Intera^ney
Task Force
on
Product
Liability
Final Report
U.S. DEPARTMENT OF COMMERCE
o
X
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Digitized by the Internet Archive
in 2012 with funding from
LYRASIS IVIembers and Sloan Foundation
http://archive.org/details/interagencytaskfOOunit
THE UNDER SECRETARY OF COMMERCE
Washington, DC. 20230
PREFACE
This report represents the culmination of over one year of effort
by a Federal Interagency Task Force in the study of the topic of
product liability. This endeavor has involved Federal agencies,
independent contractors, private organizations, as well as con-
sumers, manufacturers, distributors, retailers and insurers.
While the report does not purport to answer all questions that
have arisen in the field, it provides the most thorough analysis
of problems in the product liability area that has been published
in the United States.
It is important to emphasize the independent nature of this report.
The Chairman of the Working Task Force group and his staff were
not subject to any pressures "to find" in favor of one interest
group or another — his basic policy guideline was to be objective,
disclose the facts (or lack thereof) , and consider the competing
concerns of all groups affected by the product liability problem.
As Chairman of the Task Force, I wish to acknowledge the dedicated
staff work at the Department of Commerce and the steadfast assis-
tance given to my Department by the other member agencies. The
agencies willingly gave the time of their talented personnel to
this project. They assisted in the planning and development stage
and reviewed and commented about drafts of each chapter. While
not every comment of every agency has been incorporated, the result
of the Interagency review process was to enhance the balance and
objectivity of the report.
While this report does not represent the views of the Administration,
it is submitted for its use as well as the use of Federal and state
legislators, consumer, insurer and business groups and others who
are interested in product liability problems.
As anyone familiar with the problem knows, many solutions have been
voiced by groups that have a strong self-interest in the topic. It
is hoped that this report will allow all concerned to appreciate
both the strengths and weaknesses of their respective positions and
that it will lead to constructive solutions.
This report represents the work of a large number of people
both in government and in private organizations. Some
government personnel have devoted their full time to this
project; others have very willingly given of their time
whenever they were asked to do so. A comprehensive and
objective study of this complex subject could not have
been completed without the cooperation and support of all
of these individuals: they brought both varied disciplines
and diverse points of view to the project.
This Final Report of the Task Force represents the synthesis
of these efforts and a balancing of the many interests that
are affected by product liability problems.
The sources used by the Task Force are described in Chapter I
of this report. As a law professor for the past ten years,
I have seen most research efforts conducted on an individual
basis. On this project, I have witnessed the invaluable
dividends that can result when a large group of talented
people work together toward a common research goal. I would
like to acknowledge, with deepest appreciation, the many
individuals whose time and talents have created this report.
r
Vicror E. Schwartz
Chairman, Working Task Force
Federal Interagency Task Force
on Product Liability
THE TASK FORCE
Overall policy guidance
provided by:
at the Department of Commerce was
Chairman of the Task Force
General Counsel
Deputy General Counsel
Assistant Secretary
for Domestic and
International Business
Former Under Secretary
Former General Counsel
Under Secretary, Sidney Harman
C. L. Haslam
Homer E. Moyer , Jr .
Frank A. Weil
Edward 0. Vetter
J. T. Smith, II
The other agencies participating as Task Force members were:
Council of Economic Advisers
Department of Health, Education & Welfare
Department of Housing & Urban Development
Department of Justice
Department of Labor
Department of Transportation
Department of Treasury
Office of Management & Budget
Small Business Administration
Advice and assistance provided by:
Consumer Product Safety Commission
THE GOVERNMENT STAFF
The Working Task Force:
• Victor E. Schwartz, Professor of Law
• Council of Economic Advisors
• Department of Commerce
• Department of Health,
Education and Welfare
• Department of Housing
and Urban Development
• Department of Justice
• Department of Labor
• Department of Transportation
• Department of Treasury
• Office of Management
and Budget
• Small Business Administration
• Consumer Product Safety
Commission
Chairman
Susan Lepper
David McNichol
Samuel B. Sherwin
Kenneth Gordon
Peter Konijn
Howard B. Clark
James Brodsky
Ronald Gainer
Neil Peterson
Robert Copeland
Edward Bergin
Richard Walsh
Wolf Haber
Dr . James Van Home
Richard Sheppard
Edward Clarke
Maureen Glebes
Edward Heiden
Paul Gatons
11
Chapter Editors
Victor E. Schwartz
John Flannagan
Jane Molloy
Virgil Ketterling
Donald Smiegiel
Senior Editor
Data Editor
Technical Advisors
Howard B. Clark
Donald Jordan
Richard Johnson
Eli Bernzweig
Charles Ashley
Senior Technical Advisor
Project Director
Edward T. Barrett, II
Executive Secretary
Charles E. van der Burgh
Support and Secretarial Staff
Richard E. Smith, Jr
Carol Kindig
Patricia S. Pearson
Gladys Aiken
Antrena Bankhead
Zula Dietrich
Chris Sopko
Gloria Brown
Gladys Joseph
Administrative Officer
Editorial Assistant
Secretary to the Project Director
Administrative Support
Legal Advisors
Alfred E. Meisner
Jan Foley
Daniel C. Hurley, Jr.
Assistant General Counsel, DOC
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Citation Editors
Geoffrey L. Master
Josephine Powe
Pamela Rollins
Senior Advisor
Louis C. Santone
Director, Office of Business and
Legislative Issues
Mr. Santone and David M. Glancy, Deputy Director, Office of
Business and Legislative Issues, contributed to the original
design and organization of the Interagency Task Force. Their
office contributed analytic and administrative support during the
conduct of this study.
IV
THE PRIVATE SECTOR
The Advisory Committee on Product Liabil ity
The contributions of the Advisory Committee to the Under
Secretary of Commerce are discussed in Chapter I and in
statements by several members who are cited throughout the Final
Report . As is noted in Chapter I, this report does not
necessarily represent the views of individual members; nor should
it be considered to represent a consensus of the Committee.
Comments of the members regarding the report will be published
separately.
The Advisory Committee Members are listed as follows.
The Honorable Ned Price, Senior Member, Texas State Board of
Insurance, Austin Texas, has been serving as Chairman of the
Advisory Committee.
ADVISORY COMMITTEE ON PRODUCT LIABILITY
Ralph B. Baldwin, President, Oliver Machinery Company
Melvin Block, Esquire, Attorney at Law
Judy Braiman-Lipson , President, Empire State Consumer Assoc.,
Inc .
William M. Brooks, Senior Partner, Brooks Burke Surgical Supply
Co.
Jacob Clayman, Secretary-Treasurer, Industrial Union Department,
AFL-CIO
Robert Clements, Senior Vice President, Marsh & McLennan, Inc.
John Russell Deane III, Esquire, Attorney at Law
Vincent Graham, Vice President, Merchandise Admin., Sears,
Roebuck & Co .
Lloyd Hackler, President, American Retail Federation
Dr. Clare G. Johnson, Physician
Frederick Juer , President, Worth Bat Company
Eugene M. Kennedy, President, Whitin Machine Works
John Koch, Esquire, Covington & Burling
James H. Mack, Public Affairs Director, National Machine
Tool Builders Association
Joseph McEwen, President, Modern Handling Equipment Company
Daniel J. McNamara, President, Insurance Services Office
Edward J. Noha , Chairman of the Boards & Chief Exec. Off., CNA
Insurance
Paul Rheingold, Esquire, Attorney at Law
Fred G. Secrest, Executive Vice President, Ford Motor Company
John J. Sheehan, Legislative Director, United Steelworkers of
America
Charles W. Stewart, Jr., President, Machinery and Allied Products
Institute
William H. Wallace, Esquire, Thompson, Hine and Flory
Edward B. Wilson II, Chairman of the Board, J. Walter Thompson
Company
Richard D. Wood, Chairman of the Board, Eli Lilly & Company
W. Thomas York, President, AMF Inc.
VI
THE SYMPOSIUM ON PRODUCT LIABILITY - July, 1976
The symposium is described in Chapter VII, and an edited
version of the transcript of the proceedings will appear in the
Selected Working Papers. The contribution of the participants is
acknowledged with deep appreciation. A listing of the
participants follows:
John W. Wade
Distinguished Professor of Law
Vanderbilt University School of Law
Dr . Nina Cornell
Senior Staff Member
Council of Economic Advisors
Executive Office of the President
Honorable Richard M. Markus
(Currently) Judge, Cuyahoga County
Court of Common Pleas
(July, 1976) Spangenberg, Shibley, Traci, Lancione & Markus
Professor Jeffrey O'Connell
University of Illinois
School of Law
Professor Walter Oi
Chairman, Department of Economics
University of Rochester
Professor Douglas Olson
Associate Professor of Insurance
Wharton School of Business
University of Pennsylvania
Professor Jerry Phillips
University of Tennessee
College of Law
William H. Wallace, Esquire
Chairman of the Board
The Defense Research Institute
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Professor Alvin S. Weinstein
Department of Mechanical Engineerinj
Carnegie Mellon University
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TABLE OF CONTENTS
CHAPTER I-THE NATURE OF THIS REPORT AND THE CAUSES
OF THE PRODUCT LIABILITY PROBLEM
Page
INTRODUCTION
THE BASIS FOR A FEDERAL STUDY ON PRODUCT LIABILITY
THE FEDERAL INTERAGENCY TASK FORCE ON PRODUCT LIABILITY...
THE TASK FORCE
THE WORKING TASK FORCE
THE STAFF
THE TASK FORCE'S GENERAL GUIDELINES OF THE SCOPE OF
THE STUDY
GENERAL SOURCES OF INFORMATION
INTERAGENCY COMMENTARY
PRODUCT LIABILITY SYMPOSIUM
NOTICE IN THE FEDERAL REGISTER
PRODUCT LIABILITY ADVISORY COMMITTEE TO THE UNDER
SECRETARY OF COMMERCE 1-8
INFORMATION FROM INDUSTRY ASSOCIATIONS AND INTEREST
GROUPS , 1-9
INFORMATION REGARDING CONSUMER PERSPECTIVES ON THE
PRODUCT LIABILITY PROBLEM 1-10
HEARINGS UNDERTAKEN BY CONGRESS 1-11
THE TASK FORCE'S INDEPENDENT CONTRACTOR REPORTS 1-11
THE LEGAL STUDY 1-12
INSURANCE STUDY 1-14
INDUSTRY STUDY 1-15
AN OVERVIEW OF THE CONTENTS OF THIS REPORT 1-18
THE CAUSES OF THE PRODUCT LIABILITY PROBLEM 1-20
INTRODUCTION 1-20
DISCUSSION OF THE CAUSES 1-21
Cause I: Liability Insurance Ratemaking Procedures.. 1-21
Cause II: Manufacturing Practices 1-24
Cause III: The Tort-Litigation System 1-26
Other Causes 1-29
Inflation 1-29
Consumer and Worker Awareness 1-29
Increases in the Number and Complexity of
Products 1-30
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TABLE OF CONTENTS (CONTINUED)
Page
Product Misuse 1-30
NOTES TO CHAPTER 1 1-32
CHAPTER II-PRODUCT LIABILITY-A LEGAL FRAMEWORK
INTRODUCTION II- 1
AN OVERVIEW OF PRODUCT LIABILITY LAW II- 3
INTRODUCTION II- 3
SOME MAJOR ISSUES IN PRODUCT LIABILITY LAW II- 6
A Manufacturer's Duty to Design Its Product
Properly II- 6
Introduction II- 6
Defectiveness and Strict Liability II- 6
Strict Liability in Design Cases II- 8
The User's Conception of the Product 11-10
The Manufacturer's Ability to Make the Product
Safer II-1 1
Conclusion 11-12
The Manufacturer's Duty to Warn Users or Consumers
About Hazards Connected With Its Product 11-12
Introduction 11-12
Theories of Recovery 11-13
Factual Considerations 11-15
Conclusion 11-18
How Does the Conduct of the Product User or Consumer
Affect His Claim? 11-19
Introduction 11-19
Assumption of Risk 11-20
Misuse 11-2 3
Contributory Negligence 11-25
Comparative Fault 11-26
A Product Liability Defendant's Right to Shift the
Cost of Accidents Onto Others 11-2?
Introduction 11-27
Suits Against Ultimate Purchasers 11-29
Suits Against Intermediaries 11-30
TABLE OF CONTENTS (CONTINUED)
Page
Suits Against Co-Manufacturers 11-31
The New Doctrines of Comparative Fault 11-32
Product Liability Law in the Workplace-Have Courts
Developed or Have Statutes Required Different Legal
Treatment for Work-Related and Non-Work-Related
Injuries 11-35
Introduction 11-35
Status as an Employee 11-36
Concept of Involuntary Use of Product 11-39
The Presence of the Employer 11-41
Conclusion 11-43
A REVIEW OF PRODUCT LIABILITY DATA-AVAILABLE FROM THE
LEGAL SYSTEM 11-43
A SURVEY OF SECONDARY SOURCES 11-43
Introduction 11-43
Sources of Data and Analysis 11-44
Annual Report of the Director of the
Administrative Office of the United States
Courts 11-44
Judicial Department of Connecticut 11-45
RELATED SURVEYS CONDUCTED BY OTHER ORGANIZATIONS 11-46
Survey of Product Liability Cases in the Greater
Kansas City Area Conducted by the Kansas Trial
Lawyers Association 11-46
Illinois Jury Verdict Report-Cook County Survey,
1970-1975 11-46
AN INDEPENDENT SURVEY OF PRODUCT LIABILITY APPELLATE
CASES IN SELECTED STATES 11-47
Identification of Sample States 11-47
What the Survey Showed 11-49
Findings - The Sample States as a Group 11-51
Findings - The Individual Sample States 11-56
NOTES TO CHAPTER II 11-58
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TABLE OF CONTENTS (CONTINUED)
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CHAPTER III-THE IMPACT OF PRODUCT LIABILITY
ON SELECTED INDUSTRIES
INTRODUCTION Ill- 1
SUMMARY OF FINDINGS OF THE INDUSTRY STUDY'S INDUSTRY,
ASSOCIATION AND OTHER SURVEYS Ill- 2
LIMITATIONS OF THE DATA Ill- 4
THE INDUSTRY STUDY'S SURVEY Ill- 6
METHODOLOGY Ill- 6
How the Firms Were Selected and Questioned Ill- 6
Characteristics of Responding Firms Ill- 8
RESULTS Ill- 9
Insurance Coverage Ill- 9
Cost of Insurance III-10
Trends in Deductibles and Limits of Liability III-12
Product Liability Claims Experience III-13
Damages Paid III-14
Product Safety and Product Liability Prevention
Programs III-15
INDUSTRY ASSOCIATION AND OTHER PRIVATE SURVEYS III-15
ORGANIZATION OF THE SURVEYS III-15
CHARACTERISTICS OF RESPONDENTS III-16
RESULTS III-17
Insurance Coverage and Availability III-17
Cost of Insurance and Claims in the Selected
Industries III-17
Products With Workplace Impact III-18
Products With Consumer Impact III-33
WHAT PRIOR GOVERNMENT COLLECTED DATA SHOW III-44
INTRODUCTION III-44
WORKPLACE INJURIES III-45
CONSUMER PRODUCT INJURIES 111-4?
NOTES TO CHAPTER III III-49
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TABLE OF CONTENTS (CONTINUED)
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CHAPTER IV-PRODUCT LIABILITY PREVENTION TECHNIQUES
INTRODUCTION IV- 1
ELEMENTS OF A PRODUCT LIABILITY PREVENTION PROGRAM
(PLPP) IV- 2
THE IMPLEMENTATION OF PRODUCT LIABILITY TECHNIQUES BY
MANUFACTURERS IV- 3
INTRODUCTION , IV- 3
RESULTS OF INDUSTRY STUDY'S TELEPHONE SURVEY IV- 4
QUALITY CONTROL IV- 6
LABELING AND PRODUCT WARNINGS IV- 7
PRODUCT REDESIGN AND REMOVAL OF PRODUCTS FROM THE
MARKET IV- 8
RECALL OF PRODUCTS IV- 9
IMPLEMENTATION OF PRODUCT LIABILITY PREVENTION PROGRAMS
BY INSURERS IV-1 0
THE POTENTIAL USE OF PRODUCT LIABILITY PREVENTION PROGRAMS
IN THE FUTURE IV-1 1
GOVERNMENT AND PRODUCT LIABILITY PREVENTION IV-1 3
PRODUCT STANDARDS IV-1 3
CHAPTER V-PRODUCT LIABILITY INSURANCE
INTRODUCTION
SCOPE AND PURPOSE OF ANALYSIS
ORGANIZATION OF THE CHAPTER
THE PRODUCT LIABILITY INSURANCE POLICY
INTRODUCTION
TYPES OF POLICIES
LIMITS OF COVERAGE
DEDUCTIBLES
OCCURRENCE VERSUS CLAIMS-MADE POLICIES
THE UNDERWRITING AND PRICING PROCESS
INTRODUCTION
ISO RATE INCREASES V-1 3
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TABLE OF CONTENTS (CONTINUED)
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ISO STATISTICAL COMPILATION ACTIVITIES V-14
THE RISE IN PRODUCT LIABILITY PREMIUMS V-17
INTRODUCTION V-17
A COMPARISON BETWEEN SMALL AND LARGE BUSINESSES V-1 9
ALLOCATION OF THE PRODUCT LIABILITY PREMIUM DOLLAR V-23
PRODUCT LIABILITY UNDERWRITING AND CLAIMS EXPERIENCE V-25
INTRODUCTION V-25
UNDERWRITING EXPERIENCE DATA V-26
CLAIMS EXPERIENCE V-29
Introduction V-29
The Preliminary Report on the ISO Closed Claim
Survey V-29
Trending V-2 9
Representativeness of the ISO Sample V-30
CONCLUSION V-33
THE FINANCIAL SITUATION IN THE PROPERTY CASUALTY INSURANCE
INDUSTRY V-33
INTRODUCTION V-33
RESERVING PRACTICES V-34
UNRESOLVED ISSUES IN RESERVING PRACTICES V-36
OVERALL PROPERTY-CASUALTY EXPERIENCE V-36
MISCELLANEOUS LIABILITY EXPERIENCE V-39
THE IMPLICATIONS OF THE FINANCIAL TRENDS FOR PRODUCT
LIABILITY INSURANCE COSTS AND AVAILABILITY V-40
REINSURANCE AND SURPLUS LINES INSURANCE V-41
INTRODUCTION V-41
CHARACTERISITCS OF SURPLUS LINES INSURANCE AND COVERAGE
TRENDS V-42
REGULATION OF SURPLUS COMPANIES V-43
REINSURANCE V-43
Characteristics of Reinsurance and Coverage Trends... V-43
Product Liability Reinsurance Premiums V-45
Regulation of Reinsurance V-45
Impact of Reinsurance and Surplus Line Trends on
Product Liability Insurance V-46
CONCLUSIONS V-47
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TABLE OF CONTENTS (CONTINUED)
Page
Better Data Should Be Collected For All Product
Liability Insurance Premiums, Losses and Claims V-48
Product Liability Insurance Rates and Premiums Should
Be More Closely Related to Statistical Assessments
of Product Risk V-M8
Product Liability Insurance Rates and Premiums Should
Be Monitored to Ensure That They Are Fair,
Nondiscriminatory and Reasonably Related to Product
Risk V-4 9
There is a Need to Promote Greater Financial
Disclosure and Accountability in Product Liability
Insurance V-49
Further Studies Should Be Undertaken V-50
NOTES TO CHAPTER V V-51
CHAPTER VI -MAJOR IMPACTS OF PRODUCT LIABILITY
INTRODUCTION VI- 1
DISCUSSION OF THE MAJOR IMPACTS OF PRODUCT LIABILITY VI- 2
AVAILABILITY OF PRODUCT LIABILITY INSURANCE VI- 2
Introduction VI- 2
Total Unavailability: Analysis VI- 3
Insurance Study VI- 3
Industry Study VI- 4
Industry Association Surveys VI- 5
State Insurance Commissioners VI- 6
Correspondence Received by the Task Force VI- 7
Product Liability Advisory Committee to the Under
Secretary of Commerce VI- 7
Partial Unavailability VI- 7
Definition VI- 7
Policy Limitations VI- 8
Coverage Restrictions VI- 9
Deductibles VI -1 0
AFFORDABILITY OF PRODUCT LIABILITY INSURANCE VI-11
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TABLE OF CONTENTS (CONTINUED)
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Introduction VI-1 1
Product Liability Insurance Rates VI-13
Product Liability Premiums VI-17
Introduction VI-1 7
Industry Study VI-17
Trade Associations VI -20
Correspondence Received by the Task Force VI -21
The Product Liability Advisory Committee to the
Under Secretary of Commerce VI -23
Impact of Product Liability Insurance Premiums
Upon Small Firms VI -24
Impacts of Product Liability Upon the Cost of
Products VI -27
PRODUCT INTRODUCTION AND DISCONTINUATION VI -28
Introduction VI -28
Analysis VI -2 9
Industry Study Findings VI -29
Other Surveys of Product Manufacturers VI -29
Net Impact Upon Society of Product Liability's
Inhibiting Effect on New Product Development VI-30
BUSINESS FAILURES VI-32
Introduction VI-32
Analysis VI-32
Business Termination Because of Product Liability
Premium Costs VI-32
Business Termination Because of Unsatisfied
Product Liability Judgments VI-34
TRENDS IN THE NUMBER OF PRODUCT LIABILITY CLAIMS VI-35
Introduction VI-35
Analysis VI-36
Industry Study VI-36
Insurance Services Office VI-37
Connecticut Court System VI-37
Federal Court System VI-37
Legal Study's Survey of Appellate Cases VI-38
COMPENSATION OBTAINED BY PERSONS INJURED BY PRODUCTS VI-38
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TABLE OF CONTENTS (CONTINUED)
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Introduction VI-38
Analysis VI -39
THE RELATIONSHIP BETWEEN PRODUCT LIABILITY CLAIMS AND
PRODUCT ACCIDENTS VI-39
Introduction VI-39
Analysis VI -4 0
Workplace Product-Related Injuries VI-40
Consumer Product-Related Injuries VI-42
WORKER COMPENSATION SYSTEMS VI-43
Introduction VI-43
Analysis VI -4 4
Employee Product Liability Litigation VI-44
Subrogation VI -46
PRODUCT LIABILITY LOSS PREVENTION VI-47
Introduction VI-47
Analysis VI-49
Product Manufacturers' Loss Prevention Programs... VI-49
SUMMARY OF CONCLUSIONS VI-52
NOTES TO CHAPTER VI VI -57
CHAPTER VII-REMEDIAL APPROACHES IN THE
FIELD OF PRODUCT LIABILITY
PART I-INTRODUCTION VII-1
THE SOURCE AND SCOPE OF REMEDY ANALYSIS VII-1
BASIC CONSIDERATIONS IN EVALUATING REMEDIES VII-2
ORGANIZATION OF THE DISCUSSION OF REMEDIES VII-9
PART II-PROPOSED MODIFICATIONS OF SOME BASIC PRODUCT
LIABILITY LAW RULES VII-14
INTRODUCTION VII-14
THE BASIC STANDARD OF RESPONSIBILITY IN PRODUCT
LIABILITY CASES VII-15
Introduction to the Problem VII-15
Proposed Solutions to the Problem VII-17
Summary and Conclusions VII-18
MODIFICATION OF RULES RELATING TO THE AGE OF PRODUCTS... VII-20
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TABLE OF CONTENTS (CONTINUED)
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Introduction to the Problem VII-20
Proposed Solutions to the Problem VII-21
Statutes of Limitations or Repose VII-21
A Useful Life Duty Limitation VII-26
Summary and Conclusions VII-28
A DUTY LIMITATION FOR UNAVOIDABLY UNSAFE PRODUCTS VII-29
Introduction to the Problem VII-29
Proposed Solutions to the Problem VII-31
Summary and Conclusions VII-31
THE DEVELOPMENT OF PREDICTABLE LEGAL STANDARDS FOR
PRODUCT LIABILITY CASES VII-33
Introduction to the General Problem VII-33
Proposed Solutions to the Problem VII-33
State-of-the-Art Defense VII-33
Introduction to the Problem VII-33
Proposed Solutions to the Problem VII-35
Summary and Conclusions VII-36
Compliance with Legislative or Administrative
Standards Defense VII-37
In General VII-37
Introduction to the Problem VII-37
Proposed Solutions to the Problem VII-38
Summary and Conclusions VII-40
At the Federal Level VII-40
Introduction to the Problem VII-MO
Proposed Solutions to the Problem VII-41
Summary and Conclusions VII-42
Regulation of Expert Testimony VII-42
Introduction to the Problem VII-42
Proposed Solutions to the Problem VII-43
Court-Appointed Experts VII-43
A Test for the Qualifications of Experts... VII-44
Summary and Conclusions VII-45
MODIFICATIONS OF RULES RELATING TO CONDUCT ON THE PART
OF PRODUCT USERS VII-46
Introduction to the General Problem VII-46
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The Problem of Product Misuse VII-M?
Introduction to the Problem VII-M?
Proposed Solutions to the Problem VII-47
Standardizing Foreseeable Misuses for the
Purposes of Tort Law VII-48
Plaintiff's Misuse of Products and Comparative
Fault Principles VII-49
Alteration or Misuse of a Product by a Third
Party — Shifting Responsibility VII-49
The Problem of Plaintiff's Contributory Fault or
Assumption of Risk and Proposed Solutions VII-51
Modification of Rules Relating to Conduct on the
Part of Product Users -- Summary and Conclusions... VII-54
PART III-PROPOSED MODIFICATIONS OF SOME BASIC PRODUCT
LIABILITY LAW RULES THAT RELATE TO DAMAGES VII-56
INTRODUCTION TO THE GENERAL PROBLEM VII-56
ATTORNEYS' FEES VII-56
Introduction to the Problem VII-56
Proposed Solutions to the Problem VII-58
The Contingent Fee -- Elimination or
Modification? VII-58
Will Elimination or Modification of the
Contingent Fee Lower Product Liability
Rates? VII-58
Some of the Major Policy Considerations
Relating to the Elimination or Reduction of
the Contingent Fee VII-59
Eliminate Damages for Pain and Suffering and
Allow a Court to Award Plaintiff His Attorney's
Fee VI I -61
Impose a Penalty for Filing Suits Without
Reasonable Cause VII-62
Summary and Conclusions VII-63
REGULATION OF DAMAGE AWARDS FOR PAIN AND SUFFERING VII-64
Introduction to the Problem VII-64
Proposed Solutions to the Problem VII-67
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Abolish Awards for Pain and Suffering VII-67
Limit Awards for Pain and Suffering to a Specific
Multiple of Special Damages VII-68
Limit Awards for Pain and Suffering to a Fixed
Ceiling VII-68
Limit Awards for Pain and Suffering to a Fixed
Schedule Based on the Type of Injury Plaintiff
Endured VII-69
Summary and Conclusions VII-69
MODIFICATION OF THE COLLATERAL SOURCE RULE VII-70
Introduction to the Problem VII-70
Proposed Solutions to the Problem VII-73
Abolish the Collateral Source Rule VII-73
Modify the Collateral Source Rule VII-73
Authorize the Introduction of Collateral Sources
in Evidence VII-7^
Summary and Conclusions VII-75
RESTRICTIONS ON AWARDING PUNITIVE DAMAGES VII-75
Introduction to the Problem VII-75
Proposed Solutions to the Problem VII-78
A Method to Reduce the Impact of the Multiple
Punitive Damage Award VII-78
Should Punitive Damages be Paid to a Source Other
than Plaintiff? VII-79
Summary and Conclusions VII-80
REPLACING LUMP SUM DAMAGES WITH A PERIODIC PAYMENT
SYSTEM VII-80
Introduction to the Problem VII-80
Proposed Solutions to the Problem VII-81
Replace Lump Sum Payment Awards with a Periodic
Payment System VII-81
How a Periodic Payment System Might Function VII-82
Summary and Conclusions VII-84
FOOTNOTES VII-84
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PART IV-PROPOSED MODIFICATIONS OF PRODUCT LIABILITY RULES
RELATING TO A DEFENDANT'S RIGHT AGAINST THIRD PARTIES —
THE PROBLEM OF THE WORKPLACE INJURY
INTRODUCTION TO THE GENERAL PROBLEM VII-85
PROPOSED SOLUTIONS TO THE PROBLEM VII-87
Contribution and Indemnity Claims -- In General VII-87
Contribution and Indemnity as Applied to Injuries
in the Workplace VII-88
Allow Full Contribution by a Manufacturer Based
on the Comparative Responsibility of
Manufacturers and Employers in Regard to a
Product Work-Related Accident VII-89
Allow Manufacturers Limited Contribution Claims
Up to the Amount of the Employers' Worker
Compensation Payment VII-92
If Legislation is Enacted Allowing Manufacturers
Contribution Claims, the Matter of Employer
Coverages for Such Claims Should be Considered.. VII-92
Worker Compensation Insurance -- Experience
Rated VI 1-93
A Federal Law Allowing Contribution by a
Manufacturer Against a Negligent Employer VII-93
Summary and Conclusions VII-95
Prohibition or Modification of Subrogation by Worker
Compensation Carriers VII-95
Introduction to the Problem VII-95
Proposed Solutions to the Problem VII-97
Abolish the Right of Subrogation VII-97
Modify the Right of subrogation VII-98
Summary and Conclusions VII-99
Validation of Hold Harmless Agreements VII-99
Introduction to the Problem VII-99
Proposed Solutions to the Problem VII-101
Summary and Conclusions VII-102
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Worker Compensation as a Sole Source of Recovery —
Abolishing the Workers' Third-Party Claim VII-103
Introduction to the Problem VII-103
Proposed Solutions to the Problem VII-108
Summary and Conclusions VII-112
FOOTNOTES VII-1 13
PART V-PROPOSED MODIFICATIONS OF PRODUCT LIABILITY
INSURANCE MECHANISMS
INTRODUCTION TO THE GENERAL PROBLEM VII-1 14
RESIDUAL INSURANCE MARKET MECHANISMS VII-1 15
Residual Insurance Market Mechanisms -- at the State
or Federal Level VII-115
Residual Insurance Market Mechanisms -- Under What
Circumstances Should They Be Subsidized? VII-1 18
Introduction to the Problem VII-1 18
Justification for a Subsidy VII-119
Analogous Areas Where Federal Subsidies Have Been
Used in the Past VII-123
Summary and Conclusions VII-125
Assigned Risk Plans VII-127
Introduction to the Problem VII-127
Application of Assigned Risk Plans in the Area
of Product Liability — Some Problems VII-128
Eligibility Requirements VII-128
Allocation of Assignment VII-129
Determining Individual Premium Rates VII-129
Inadequate Coverage Problems VII-130
Summary and Conclusions VII-130
Pooling Mechanisms VII-130
Introduction to the Problem VII-130
Proposed Solutions to the Problem VII-132
Voluntary Pooling Mechanisms VII-132
Mandatory Pooling Mechanisms -- Joint
Underwriting Associations VII-135
Introduction VI 1-135
xxii
TABLE OF CONTENTS (CONTINUED)
Page
Application of Mandatory Pooling Mechanisms
in the Area of Product Liability — Some
Problems VII-1 36
Disruption Factors VII-136
How Long Should the Pooling Mechanism
Be in Operation? VII-137
Should the Pooling Mechanism be the
Exclusive Source of Product Liability
Insurance? VII-1 38
Which Insurers Should be Required to be
Members of the Pooling Mechanisms? VII-139
How Should the Assessment Basis for the
Pooling Mechanism be Determined? VII-140
How Should Losses be Recouped? VII-141
Other Major Issues Concerning Mandatory
Product Liability Insurance Pooling
Mechanisms VII-1 42
Summary and Conclusions VII-142
Federal Insurance and Reinsurance VII-143
Introduction the the Problem VII-143
Direct Federal Insurance VII-143
Federal Reinsurance VII-145
Reinsurance — What Is It? VII-146
Can Federal Reinsurance Ease Product Liability
Rates for Individual Insureds? VII-147
Is Federal Reinsurance a Long- or a Short-
Range Remedy? VII-148
Who Should Be Eligible to Participate in the
Reinsurance Mechanism VII-150
Summary and Conclusions VII-152
Captive Insurance Companies VII-154
Introduction to the Problem VII-154
Analysis of the Potential Advantages of Captive
Insurance Companies VII-155
Benefits of Captives -- A Summary VII-160
Proposed Solutions to the Problem VII-160
XXlll
TABLE OF CONTENTS (CONTINUED)
Page
Modifying Insurance Regulations for Captives.. VII-161
Incentives Based on Tax Savings VII-164
Overall Summary and Conclusions VII-167
Structured Self-Insurance Programs VII-167
Introduction to the Problem VII-167
Proposed Solutions to the Problem VII-I59
Summary and Conclusions VII-172
MANDATORY PRODUCT LIABILITY PREVENTION PROGRAMS VII-172
Introduction to the Problem VII-172
Proposed Solutions to the Problem VII-175
Require Manufacturers to use Reasonable Product
Liability Prevention Techniques as a Quid Pro
Quo for Participation in Government Reinsurance
or Pooling Programs VII-175
Require Insurers to Build into Their Product
Liability Rates an appropriate Discount When
Insureds Use Proper Product Liability
Prevention Techniques VII-177
Require Insurers to Assist in Loss Prevention
Activity on Behalf of Their Insureds VII-180
Increase Government Action to Assist Businesses
in the Area of Product Liability Prevention VII-183
Summary and Conclusions VII-186
REMEDIES DESIGNED TO ELIMINATE UNSATISFIED JUDGMENTS... VII-187
Introduction to the General Problem VII-187
Proposed Solutions to the Problem VII-189
Do Data Show that Mandatory Product Liability
Insurance Laws or Unsatisfied Judgment Funds
are Needed? VII-189
Mandatory Product Liability Insurance Laws VII-191
Introduction to the Problem VII-191
Which Manufacturers Would Be Covered by the
Law? VII-191
How Much Coverage Would be Necessary? VII-193
Relationship With Residual Insurance
Mechanisms VII-195
XX IV
TABLE OF CONTENTS (CONTINUED)
Page
Relationship With No-Fault Compensation
Systems VI I -195
Unsatisfied Judgment Funds VII-195
Introduction to the Problem VII-195
The Source of Revenue for an Unsatisfied
Judgment Fund VII-1 96
Procedure for Recovery Against the Fund VII-1 97
Limitation on Amounts Paid Out of the Fund.... VII-198
Summary and Conclusions -- Comparison of Mandatory
Product Liability Insurance and Unsatisfied
Judgment Funds VII-1 99
FOOTNOTES VII-200
PART VI-ALTERNATIVE METHODS FOR COMPENSATING CONSUMER
PRODUCT INJURIES: HEREIN NO-FAULT COMPENSATION SYSTEMS
AND ARBITRATION
INTRODUCTION TO THE GENERAL PROBLEM VII-202
NO-FAULT COMPENSATION SYSTEMS VII-202
Introduction the the Problem VII-202
No-Fault Systems -- A Description VII-203
The Government's Role in a Product Liability
No-Fault Compensation System VII-209
Alleged Benefits of a No-Fault Product Liability
System VI I -2 12
Some Major Problems with the Use of First-Party
No-Fault Systems in Product Liability Cases VII-217
Summary and Conclusions VII-228
ARBITRATION VII-229
Introduction to the Problem VII-229
Proposed Solutions to the Problem VII-230
The Format of Arbitration in Product Liability
Cases VII-230
Constitutional Problems with Compulsory
Non-Binding Arbitration VII-232
Structure of the Arbitration Panel VII-234
XXV
TABLE OF CONTENTS (CONTINUED)
Page
Alleged Benefits of a Product Liability
Arbitration Process VII-234
Summary and Conclusions VII-238
FOOTNOTES VII-240
PART VII-SYNTHESIS OF CHAPTER AND CONCLUSIONS VII-242
XXVI
List of Tables
No.
Page
II-1 Federal District Courts Product Liability Cases:
Total Breakdown 11-74
II-2 Federal District Courts Product Liability
Cases--Breakdown by Percentage 11-74
II-3 Federal District Courts Product Liability
Cases--Compar ison to Total Civil Cases 11-75
II-4 Federal District Courts Product Liability
Cases--Personal Injury Torts 11-75
II-5 Connecticut Court of Common Pleas--TGtal Product
Liability Breakdown 11-76
II-6 Connecticut Superior Court--Total Product
Liability Breakdown 11-77
II-7 Key Statistical Breakdown--Total Cases For
Survey Undertaken in Legal Study 11-78
II-8 Key Statistical Breakdown--Trend : Product
Class 11-78
II-9 Key Statistical Breakdown--Time Interval Between
Year of Manufacture and Year of Injury By
Product Class 11-79
11-10 Key Statistical Breakdown: Forum 11-79
11-11 Key Statistical Breakdown--Trend : Total Damages
Awarded 11-80
11-12 Key Statistical Breakdown--State or Federal
Court Forum 11-80
xxvii
No . Page
11-13 Increase in Number of Reported Cases: 1965-70
V. 1971-76 11-81
11-1^ Key Statistical Breakdown--Work- and Non-Work-
Related Cases 11-81
11-15 Key Statistical Breakdown--Disposition 11-82
11-16 Key Statistical Breakdown--Damages 11-82
III-1 Number of Firms in the Sample, Number of
Responses and Response Rates, By Product and
Sales Categories III-50
III-2 Average Total Gross Sales Per Firm, By Product
and Sales Category — 1975 (thousands of
dollars) II I -51
III-3 Extent of Current Product Liability Coverage,
By Size of Category III-52
III-4 Reasons For Not Carrying Product Liability
Insur ance--Percent of Total Responses By Size
Category III-53
III-5 Comprehensive General Liability Coverage--
Average Cost Per $1,000 Sales — 1971 to 1976,
By Size Category III-54
III-6 Estimated Average Product Liability Insurance
Cost Per $1,000 Sales Under Comprehensive
General Liability Plans By Size
Category-1971-76 Ill -55
III-7 Estimated Average Primary Product Liability
Insurance Costs Per $1,000 In Designated Product
Category Sales--1 971 -76 III-56
III-8 Umbrella Coverage Average Costs Per $1,000,
By Size Category — 1 97 1 -76 III-57
XXVlll
No . Page
III-9 Average Deductible or Self-Insurance Retention
Levels, By Size Category — 1971-76 (thousands
of dollars) II I -58
III-10 Number and Percent of Firms Reporting Any
Product Liability Claims, By Size
Category — 1971-76 II I -59
III-1 1 Average Number of Pending Claims, By Product
Category — 1971-76 II I -60
III-12 Average Number of New Claims per Firm By Size
Category — 1971-76 II I -61
III-13 Average Number of new Claims per Firm By
Product Category — 1971-76 III-62
III-14 Total Damages Sought in Pending Claims, Average
Amount Per Firm, By Size Category — 1971-76
(thousands of dollars) III-63
III-15 Total Damages Sought in New Claims, Average
Amount Per Firm, By Size Category--1 97 1 -76
(thousands of dollars) III-64
III-16 Average Annual Settlement Amounts Per Firm By
Size Category — 1971-76 (thousands of dollars)... III-65
III-17 Summary of Trade Associations and Other
Organizations Participating in the Product
Liability Study III-66
III-18 Size Characteristics of Respondents to the Trade
Association Surveys III-67
III-19 Reasons Given for Not Carrying Product Liability
Insurance in Trade Association Surveys III-68
III-20 Product Liability Insur ance--Average Annual Cost
Per Thousand Dollars of Sales — (ATMA) III-69
XXIX
No . Page
III-21 Claims Experience of Reporting Firms — (ATMA).... III-70
III-22 Product Liability Insur ance--Average Annual Cost
Per Thousand Dollars of Sales — (IHEA) III-71
III-23 Claims Experience of Reporting Firms — (IHEA).... III-72
III-24 Claims Experience During the Period From 1970 to
1 975-- (MAPI) III-73
III-25 Claims Experience of Reporting Firms--(RPI) III-74
III-26 Insurance Cost Per Firm — (WMMA) III-74
III-27 Claims Experience of Reporting Firms-- (WMMA) ... . III-75
III-28 Primary Product Liability Insurance--Average and
Median Annual Costs Per Thousand Dollars of
Sales-- (SPI) III-76
III-29 Claims Experience For All Respondents — (SPI).... III-77
III-30 Primary Product Liability Insurance--Average
Annual Cost Per Thousand Dollars of
Sales. — (CMF) II I -7 8
III-31 Claims Experience of Reporting Firms--(CMF) III-79
III-32 Average Insurance Costs Per Firm — (ADCI) III-80
III-33 Product Liability Insurance-Average Annual Cost
Per Thousand Dollars of Sales-(RVIA) III-81
III-34 Claims Experience Since 1970, By Size of
Firm. — (ATM I) II 1-82
III-35 Product Liability Insurance-Average Annual Cost
Per Thousand Dollars of Sales- (WWEMA) III-83
III-36 Claims Experience of Reporting Firms- (WWEMA) ... . III-84
xxx
No.
Page
IV-1 Reported Impact of Selected Product Safety
Programs IV-1 8
IV-2 Special Product Liability Prevention Programs,
By Size of Sales Category IV-19
IV-3 Special New Programs Considered in the Last Year
to Reduce Claims, By Size of Sales Category IV-20
V-1 Number of Companies With Per Occurrence
Deductibles V-54
V-2 Average Deductible or Self-Insurance Retention
Levels By Sales Category 1971-76 V-55
V-3 Product Liability Rating Methods..... V-56
V-4 Basic Monoline Rate Increases for Product
Liability Insurance December 1976 and Over
August 1975 V-57
V-5 Increased Limits Factors For Bodily Injury and
Property Damage V-59
V-6 Product Liability Classes With Monoline Premiums
of $10 or More Per $1,000 of Sales V-60
V-7 Effect of ISO Revisions on Product Liability
Premium Rates V-61
V-8 Rate Increases in (a) Rated Products V-62
V-9 Estimated Average Product Liability Cost Per
$1,000 in Total Sales Under Comprehensive
General Liability Plans 1971-76 V-63
V-10 Comprehensive General Liability Coverage Average
Cost Per $1,000 Sales By Product and Size
Categories 1976 V-64
XXXI
No.
Page
V-1 1 Comparative Analysis of Leading Indicators for
Small, Medium and Large Firms V-65
V-12 Estimated Allocation of Product Liability
Premium Dollar V-66
V-13 Estimated Allocation of Total 1976 Product
Liability Premiums V-67
V-IM Product Liability Insurance Underwriting
Experience, Bodily Injury and Property Damage
Combined 1969-74 V-68
V-15 Product Liability Insurance Incurred Losses,
Bodily Injury and Property Damage Combined
1969-74 V-69
V-16 Product Liability Insurance Incurred Losses,
Bodily Injury 1969-74 V-70
V-17 Product Liability Insurance Incurred Losses,
Property Damage 1969-74 V-71
V-18 Products Generating Most Payment Dollars, Bodily
Injury (Untrended and Trended) V-72
V-1 9 Products Generating Most Payment Dollars,
Property Damage (Untrended and Trended) V-73
V-20 Product Liability Claims, Time Interval From
Date of Occurrence to Date of First Report,
Bodily Injury and Property Damage (Untrended)... V-74
V-21 Product Liability Claims, Time Interval From
Date of Occurrence to Date of Closing, Bodily
Injury and Property Damage (Untrended) V-75
V-22 Distribution of Product Liability Claims By
Injured Party's Status in Occurrence (Untrended
and Trended) V-76
XXXll
No.
Page
V-23 Product Liability Closed Claim Costs By Stage Of
Legal System (Untrended) V-77
V-24 Distribution of Paid Bodily Injury Claims and
Losses, 1976 Calendar Year (Liberty Mutual) V-78
V-25 Annually Adjusted Incurred Loss Estimates, 10
Leading Writers of Miscellaneous Liability
Insurance 1972-75 V-79
V-26 Property Casualty Insurance Industry: Estimates
of Financial Operating Results 1971-76 V-80
V-27 Total Property-Casualty and Miscellaneous
Liability Premiums 1972-76 V-81
V-28 Property-Casualty and Miscellaneous Liability
Combined Loss Ratios After Dividends 1972-76.... V-81
V-29 Loss Ratios and Aggregate Premiums, 10 Leading
Writers of Miscellaneous Liability Insurance
and Total Industry 1972-76 V-82
V-30 Range in Loss Ratios for 10 Leading Writers of
Miscellaneous Liability Insurance 1972-76 V-82
V-31 Surplus Line Premiums Reported By Major State
Insurance Departments 1972-75 V-83
V-32 Total American Reinsurance 1960-75 V-8^
xxxiii
EXECUTIVE SUMMARY FOR THE FINAL REPORT OF THE
FEDERAL INTERAGENCY TASK FORCE ON PRODUCT LIABILITY
THE NATURE OF THIS REPORT
This report is the culmination of over one year of intensive
study about the topic of product liability. It describes the
causes, nature and scope of problems that have arisen in that
area. Also, it analyzes potential cures or remedies that have
been proposed as solutions for those problems.
The topic of product liability deals with the full scope of
how our legal and private insurance systems compensate persons
who are injured by products. It defines the responsibility of
retailers, distributors and manufacturers for products that cause
injury. In 1975, an apparent problem arose in the field of
product liability. A number of manufacturers and business
periodicals alleged that product liability insurance had become
unavailable or unaf fordable . After some initial investigation, a
Federal Interagency Task Force was established by the White House
to study the product liability problem and report back to it on
or before December 15, 1976. A report based on that document,
entitled "The Federal Interagency Task Force on Product Liability
Briefing Report" was released to the public on January 4, 1977.
The Briefing Report was based on preliminary drafts of three
independent contractor studies commissioned by the Task Force as
well as pre-December 1, 1976 data and information. The
independent contractor reports were in the legal, insurance and
industry areas.
This report is based on the final versions of the contractor
reports and a wide array of resources set forth at pp. 1-7 - 17.
MAJOR IMPACTS OF THE PRODUCT LIABILITY PROBLEM
Introduction
Major impacts of the product liability problem are discussed
in Chapter VI of this report. A very highly condensed summary of
those findings is set forth here. The full discussion in Chapter
VI shows that very little solid information is available with
xxxiv
respect to some of these topics, e.g., the number of product
liability claims filed annually. Nevertheless, the report
discusses those subjects in order to abate the growing amount of
misinformation that has been set forth about product liability.
Chapter III of this report sets forth detailed findings based on
the industry contractor's independent survey of 337 corporations
and 20 trade associations. These findings are summarized at pp.
III-2 - 4. of this report and analyzed in that chapter.
In Chapter II of this report we set forth our legal
contractor's review of product liability data that have been
derived directly from the legal system. The first section
describes the very limited data that could be found about product
liability claims and settlements from legal sources. See pp. II-
43 - 47. Only the State of Connecticut and the Federal courts
(both since 1974) collect these data.
The second section sets forth the results of a product
liability survey undertaken by the legal contractor. The
contractor surveyed 655 appellate cases from eight representative
states. See pp. 11-47 - 57. The data from Chapter II have been
used, where possible, in describing major impacts.
SUMMARY OF MAJOR IMPACTS OF THE PRODUCT LIABILITY PROBLEM
Availability of Product Liability Insurance
Total Unavailability
There is no widespread problem of product liability insurance
being unavailable. A few companies in the Task Force's target
industries and other high-risk product lines are having
difficulty obtaining product liability insurance. For some
others, product liability rates would appear to be unaf fordable--
it has been persuasively argued to the Task Force that this is a
practical equivalent of unavailability.
Partial Unavailability
Policy limitations. --Policy limitations that insurance
companies have been willing to offer for products coverage do not
appear to have changed significantly since 1971. Thus, insurance
XXXV
companies are not forcing insureds to retain more risks by
reducing the amount of coverage that they are willing to make
available. On the other hand, some underwriters are reluctant to
increase the limits of liability for existing coverage. Thus,
some manufacturers whose products' risk exposure appears to be
increasing may be unable to protect themselves against that
increase by raising the limits of their products coverage.
Coverage restrictions . — Task Force information sources were
not wholly in accord on the question of whether coverage
restrictions were increasing. The Industry Study found
restrictions on products coverage to be more prevalent than the
Insurance Study, which concluded that coverage exclusions are
rarely imposed by insurance companies. Major product liability
insurers appear to be willing to write coverage for most product
lines. Smaller insurance companies may exclude some very high-
risk products from their General Comprehensive Liability
coverage .
Deductibles . — Deductibles appear to be increasingly prevalent
among our target industry groups. Furthermore, the levels of
deductibles appear to have increased significantly between 1975
and 1976 for both large- and medium-sized firms in our target
industry groups. This increase in the frequency and level of
deductibles may be a matter of choice on the part of insureds
rather than a requirement of the insurance companies.
Af f ordabil ity of Product Liability Insurance
As
it affects insureds. — There has been
substantial
increase in the cost of product liability insurance since 197^ in
all of the Task Force's target industries. The increase in
premiums appears to have been greater for small as compared to
large businesses. Also, small firms appear less able to cope
with af fordabil ity problems than large firms. Certain industries
appear to have been subject to very substantial increases. These
include manufacturers of medical devices, pharmaceuticals, power
lawnmowers, industrial chemicals and metal castings. Anecdotal
data show similar impacts on manufacturers of sporting goods and
ladders. In some instances manuf acturers--especially of durable
goods--may not be able to pass this increased cost on to their
customers .
xxxvi
As it affects the price of products . — One
measure the exact cost of product liability insura
the price of a product. The average cost of pr
insurance is less than 1 percent of sales in most
Force's target industries, but it is hi
manufacturers. The total cost of product liabilit
it affects the price of a product may be abov
figure because distributors and retailers may also
cost of their product liability insurance
Furthermore, other product liability costs, i
product liability premiums, may be reflected in
product .
cannot readily
nee as part of
oduct liability
of the Task
gher for some
y insurance as
e the 1 percent
pass on the
to purchasers,
n addition to
the price of a
Product Introduction and Discontinuation
Product liability problems in the pharmaceutical and other
high-risk product lines may reinforce trends against new product
development with the result that some socially beneficial
products may never be developed or may be discontinued. This is
especially true for smaller firms. On the other hand, some of
the products that are not produced (or are discontinued) may be
ones whose potential for causing harm outweighs their social
utility. This is an area that deserves further investigation.
Business Failures
Product liability problems do not appear to have been a
direct and sole cause of business failures. On the other hand,
circumstantial evidence suggests that substantial product
liability premium increases may be one of several factors that
cause small businesses in high-risk product industries to go out
of business. In the future, some small businesses may be placed
in default by product liability judgments.
Trends in the Number of Product Liability Claims
No organization, public or private, currently records all
product liability claims or lawsuits. The best "estimate" of the
number of product liability claims filed in 1976 is between
60,000 and 70,000. Data are not available that would provide a
firm indication of the trends in the number of product liability
claims in the 197^-1976 period. In our target industries, the
xxxvii
average number of pending claims appears
substantially between 1971 and 1976.
to have increased
Compensation Obtained by Persons Injured by Products
A small percentage of persons injured by products file
product liability claims. There is little information available
regarding the compensation obtained by claimants, although, a
preliminary closed claim survey suggests that a relatively high
percentage receive their medical expenses, wage losses and other
out-of-pocket expenses other than legal fees. A recent Insurance
Services Office closed claim survey and other data sources
suggest that less than 6 percent of product liability claims are
litigated to a final court verdict. Of those who litigate cases,
less than 50 percent recover any damages.
The Relationship Between Product Liabil ity
Claims and Product Accidents
Limited data collected by our Industry Study suggest that any
increase in product liability claims in the majority of our
target industries is not due to an increase in the number of
product-related accidents. This finding appears to be firmer in
regard to workplace products than consumer products.
Worker Compensation Systems
Some persons injured by products in the workplace are
supplementing their Worker Compensation recovery by the use of
product liability suits. Worker Compensation insurers and self-
insuring manufacturers or distributors are able to recoup some of
their injury compensation costs through subrogation in product
liability claims. These claims would appear to have only a very
minor impact on the Worker Compensation system. Insurers stress
that workplace accidents and resultant product liability claims
have been an important cause of the product liability insurance
rate increases that have been generated for industrial products
within our target groups.
XXXVlll
Product Liability Loss Prevention
The tort-litigation system and increased product liability
insurance costs have caused many manufacturers of high-risk
products to devote more time and resources to product liability
loss prevention; however, a number of such businesses have not
done so. Limited data show that a much higher percentage of
large, as opposed to small manufacturers, have implemented
product liability loss prevention programs. Also, insurers
appear to have supplied product liability advice more frequently
to large insureds than to small ones. In addition, company
executives interviewed by the industry contractor did not
perceive a direct correlation between the implementation of
product liability loss prevention programs and a reduction in
insurance costs.
THE PRINCIPAL CAUSES OF THE PRODUCT LIABILITY
PROBLEM AND THEIR REMEDIES
Introduction
The Task Force's Briefing Report identified three principal
causes of the product liability problem--liabil ity insurance
ratemaking procedures, the tort-litigation system, and
manufacturing practices--and their remedies. Little has changed
in the intervening months to alter the Task Force's perspective
about the principal causes. This report does not rank these
causes in a hierarchical chain; data do not permit a conclusion
that one cause is more important than the other. Lesser causes
include inflation, consumer and worker awareness of their legal
rights, increases in the number and complexity of products, and
product misuse.
There is a tendency for each group that has a special
interest in the product liability problem to assert that "the
cause" lies in conduct unrelated to their own group.
It is the view of the Task Force that the product liability
problem is based on a confluence of causes and that it will only
be resolved if each cause is properly addressed.
xxxix
For the convenience of the reader, we have summarized each
cause and then remedies that may resolve it.
Analysis
(See pp. 1-21 - 31)
Cause 1: Liability Insurance Ratemaking Procedures
In the overwhelming majority of cases, insurance company
sources did not rely on data to support premium increases that
occurred in the 197^-1976 period.
Nevertheless, a number of representatives from the insurance
industry have stated that product liability rates were set too
low in the 1971-1974 period. Insurers argue that in the early
1970 's they were not aware that product liability would become a
substantial problem. The Task Force's Legal Study showed that
strict product liability first came into the law as an important
force in 1965. By 1971 and 1972, a number of major states had
adopted strict product liability theories. Nevertheless, this
did not alter the product liability insurer practice of combining
product liability coverages in Comprehensive General Liability
packages. This factor, along with uncertainties in insurer
reserving practices, makes it almost impossible to obtain an
accurate profit and loss picture for product liability insurance.
Thus, we have been unable to make a finding as to whether product
liability premium increases were, as a whole, justified in the
197^-1975 period. Circumstantial evidence suggests that some
insurers engaged in "panic pricing." It would appear that some
insureds may be paying a higher premium than data would justify,
and others may be paying a lower premium. A full discussion of
this cause will be found at p. 1-21. Chapter V describes, in
detail, the pricing process, claims experience, and the financial
situation in the insurance industry.
Remed ies that improve ratemaking procedures
Premium, loss and claim data should be collected in a manner
that is as statistically sound and reliable as possible for
ratemaking and other purposes.
xl
An improved data base is an essential first step in the
solution of product liability problems--it will permit
examination of actual trends in product liability claims
and costs to insurers.
Product liability insurance rates and premiums
more closely related to statistical asses
product risks. Rates for most product
insurance risks are based on subjective estim
anticipated loss costs. Consequently, i
possible to draw direct correlations between
and product risks. Nevertheless, it may be di
collect sufficient data for ratemaking purpose
product classes. To overcome this
consideration should be given to expanding tho
classes where experience is generated slowly.
should be
sments of
1 iabil ity
ations of
t is not
premiums
fficult to
s for some
problem ,
se product
3. Product liability insurance rates and premiums should be
monitored to ensure that they are fair, non-
discriminatory and reasonably related to product risk.
In the area of product liability insurance,
consideration should be given to targeting review of
those rate increases which exceed a threshold amount.
Such a procedure would focus regulatory attention on
those rates and premiums which have the most significant
adverse effect on business. Such monitoring, would also
promote greater uniformity among rates charged to firms
producing products with similar risks.
In order to achieve this goal, it is essential that
state insurance regulators have access to a data base
which includes nationwide experience on all product
liability claims.
4. There is a need to promote greater financial disclosure
and accountability in product liability insurance. It
would be constructive if a system were devised whereby
insurers would report all product liability experience
as a separate line on their annual report filed with
state insurance departments. This would permit
examination of aggregate product liability experience of
insurers. Also, it would appear to be both in the
xli
insurers' and the public interest for insurers to
provide information that would enable regulators and
others to get a more accurate assessment of the
insurers' complete financial situation regarding claims
and reserves.
5. It may be necessary to conduct further studies on
reserving practices, including evaluation of methods of
estimating reserves, the disposition of the excess of
reserves that are not ultimately paid to claimants and
related claim expenditures, and the appropriateness of
existing loss development and trend factors.
The basis for these conclusions and details of insurer-
related remedial proposals are set forth in Chapter V of
this report.
Cause 2: Manufacturing Practices
The data suggest that more manufacturers are giving greater
attention to product liability loss prevention techniques.
Nevertheless, some companies--especially some smaller ones--are
unable to devote adequate resources to product liability loss
prevention programs and do not receive assistance from their
insurance companies in regard to this problem. In the long run,
this leads to product liability claims, greater insurance and
other costs for the manufacturer and the product user. Details
with respect to this cause are set forth at pp. 1-24 - 26.
Remedies that address unsafe manufacturing practices
1. Any government pooling or reinsurance mechanism which
allows a subsidy to individual insureds should include a
provision that will provide product users with the
assurance that the program's participants utilized
reasonable product liability loss prevention techniques.
See p. VII-175.
2. Those charged with the responsibility of approving
insurance rates should give careful consideration to
developing a technique whereby insurers would build into
product liability insurance rates an appropriate
xlii
discount when insureds used proper product liability
prevention techniques. See p. VII-177.
3. While insurers are in an excellent position to assist
individual insureds in implementing sound product
liability loss prevention programs, there are serious
problems with making a requirement of this type
mandatory. If this approach were taken, an appropriate
surcharge might be added to product liability insurance
which would allow a mandate of this type to be
implemented. See p. VII-180.
4. Under existing legislation, it would be possible to ask
an appropriate Federal agency to coordinate product
liability risk information for a variety of agencies and
make it available to manufacturers that could benefit
from it. See p. VII-183. It is less certain that
government personnel should engage in providing direct
technical assistance to manufacturers in the area of
product liability loss prevention techniques. See pp.
VlI-185 - 186.
Cause 3: Uncertainties in the Tort-Litigation System
The tort-litigation system does not, in general, impose
absolute liability on manufacturers of products. In many
situations, a jury is asked to balance the economic burden on the
manufacturer to produce a safe product against the probability
that the product may cause injuries and the severity of those
injuries. On the other hand, some appellate courts do not view
product liability law as a means of apportioning responsibility
between parties, but as a compensation system. Some decisions
from these courts come very close to holding that the tort-
litigation system should provide a recovery when persons are
injured by products.
While these cases appear to be relatively few in number,
insurers have regarded them as quite important in their pricing
practices. If one state court reaches a decision of this type,
others could follow it in the future. It is almost impossible to
predict when courts will change product liability rules and
broaden the exposure of insureds. The instability in product
xliii
liability law appears to have increased defense and investigation
costs .
A detailed discussion of how product liability law rules vary
(in five important areas) is set forth at pp. 11-1 - 43.
Remedies That May Relieve Uncertainties in the Tort-Litigation
System
Introduction
Individual state modifications of the tort system may not
alleviate the uncertainty problem. This is because most products
are distributed in a large number of jurisdictions. Thus,
product liability insurance rates are made on a nationwide, not
on a local basis. Where product liability insurance costs are
passed on in the price of a product, consumers in some
jurisdictions may pay for legal interpretations that are rendered
in others. Among the primary areas of uncertainty in basic
product liability law are rules relating to the responsibility of
the manufacturer in designing its product and warning about
hazards connected with that product. See pp. 11-1 - 2?.. 1-24.
We have concluded that this cause of the product liability
problem can only be addressed by a careful review of product
liability law as a whole. In Chapter VII, this report addresses
a wide variety of these topics and suggests ways in which this
cause of the product liability problem might be reduced or
eliminated. Basic considerations that were utilized in
evaluating the remedies are set forth at p. VII-2 et. seq .
Chapter VII itself is summarized at p. VII-242 et^ seq . of this
report .
The Task Force did not decide whether uniform rules should be
formulated at the Federal or state level; rather, it has left
that issue for policymakers to determine in light of this report
as well as other information that is available on the topic of
product liability.
While uniform product liability rules should be developed, it
also will be useful to engage in the further study of the utility
of a no-fault compensation system. While this report does not
resolve the ultimate issue of whether no-fault should or should
xliv
not be used in the area of product liability, it defines the
issues that must be resolved before a decision of that kind can
be made. While the Task Force has not determined whether this
study should be undertaken at the Federal or state level, it
suggests that duplicative study costs be avoided.
Major issues which must be resolved in the
development of uniform product liability rules
1 . The Basic Standard of Responsibility
The basic standard of responsibility for product
liability should separately identify problems relating
to defects in construction from defects in design and
defects based on a failure to warn. Our discussion of
the details of this issue are set forth at pp. VII-15 -
18 of this report.
2. Modification of Rules Relating to the Age of Products
There is some merit in the suggestion that the tort-
litigation system should set forth a period of time
where a manufacturer's duty to product users terminates.
On the other hand, fixed statutes of repose can work an
unfair hardship on injured parties. This report
attempts to balance the interests of consumers and
manufacturers in this difficult area. The details of
our conclusions are set forth on pp. VII- 18 - 28.
3. A Duty Limitation for Unavoidably Unsafe Products
Some products are unavoidably unsafe in their normal
use. While this report suggests that manufacturers
should not be deemed liable for injuries caused by
unavoidably unsafe products, shielding the manufacturer
may leave a seriously injured consumer without
compensation. Also, the current approach to the topic
subjects manufacturers to considerable defense costs.
Long-term resolutions in this topic area seem
particularly suited to more major modifications in tort
law. See pp. VII-29 - 32.
xlv
4. The Development of Predictable Legal Standards for
Product Liabil ity Cases
a.
State-of-the-art defense
It would be inadvisable for product liability law
to adopt a state-of-the-art defense based on
standards customarily used in an industry. On the
other hand, courts that deem the technological
state-of-the-art totally irrelevant fuel the
uncertainty in product liability law. This report
suggests an approach that would
manufacturers without permitting them
product standards used in litigation.
33 - 37.
be fair to
to control
See pp. VII-
b. Compliance with
standards defense
legislative or administrative
There might be some incentive towards risk
prevention if a manufacturer were given a tort law
benefit on the basis of its compliance with
appropriate legislative or administrative
standards. Nevertheless, a loose application of
that benefit might produce the opposite result.
This report suggests a method whereby certain
standards would be deemed to create a rebuttable
presumption that a product conforming to it was
reasonably safe in regard to that specific
standard. See pp. VII-37 - 42.
Regulation of expert testimony
Courts might make wider use of court-appointed experts under
a procedure similar to that outlined in Federal Rule 706. When
experts are utilized, the court might hold a preliminary hearing
to test the qualifications of experts under a procedure outlined
in this report at pp. VII-42 -46. Arbitration may present the
best method for regulating expert testimony. See pp. VII-229 - -
239.
xlvi
Modification of rules relating to conduct on
the part of product users
In some situations, it may be appropriate for courts to
impose a duty on manufacturers to warn about potential misuses of
a product. While it is just to permit manufacturers to know the
exact nature and extent of this duty, there does not appear to be
a readily available neutral source that could formulate that
responsibility. The report shows how a comparative
responsibility system might balance the interests of both
consumers and manufacturers in cases of product misuse. See pp.
VII-46 - 55.
Proposed modifications of some basic product liability
rules that relate to damages
Modification of rules relating to damages have the potential
of providing rationality and stability in the tort-litigation
system. See pp. VII-56 - 84.
a. Attorneys' Fees
Defense costs, rather than the contingent fee, have
directly affected the cost of product liability
insurance. Remedies that foster settlement and decrease
the need for litigation reduce this cost. See p. VII-
62.
The contingent fee, on occasion, may tempt an attorney
to bring a frivolous suit. To alleviate this problem,
it may be more appropriate to penalize those specific
attorneys by imposing sanctions against them, than it is
to abolish the contingent fee system. See p. VII-62.
The greatest potential abuse in the contingent fee
system appears to arise in some high verdict cases. A
sliding scale contingent fee system may correct this
abuse, but it must have plasticity to account for cases
where attorneys are deserving of a fee that is above the
scale. See pp. VII-59 - 62.
xlvii
b. Regulation of Damage Awards for Pain and Suffering
Value judgments abound in regard to the question of
whether common law rules for damages for pain and
suffering should be changed. See pp. VII-64 - 69. This
report suggests that approaches that limit (rather than
eliminate) damages for pain and suffering have the
greatest potential for balancing the variety of
considerations that must be evaluated in formulating
such a change. If the change were applied in product
liability alone, it should be specially justified.
c. Modifications of the Collateral Source Rule
Proposals to modify the collateral source rule
potentially affect all of tort law. The area of product
liability is one in which a selective abolition of the
collateral source rule might be justified. This should
occur where product liability law is not based on fault,
but on principles of "risk distribution" or an
"enterprise theory of liability." Very careful
consideration should be given to the scope of any
modification of this rule. See pp. VlI-70 - 75.
d. Restrictions on Awarding Punitive Damages
A procedure that may mitigate unfairness regarding
punitive damages in the area of product liability is to
have the judge rather than the jury determine the amount
of punitive damages. In making this determination, the
judge could consider, among other factors, the amount of
punitive damages the defendant has already paid. The
jury would still determine whether the damages should be
awarded. For details see pp. VIl-75 - 80.
e. Replacing Lump Sum Damages with a Periodic Payment
System
It would be useful to obtain more precise information as
to whether the potential savings connected with a
periodic payment system would be cancelled out by
administrative costs connected with monitoring or
xlviii
modifying the basic fund. This system could be more
easily utilized if it were adopted with arbitration or a
no-fault compensation system. See VII-80 - 84.
Major Issues Involving Third-Party
Claims and Workplace Injuries
Introduction
According to the recent Insurance Services Office Closed
Claim Survey, workers injured on the job are involved in 11
percent of product liability incidents resulting in claim
payment. However, these incidents account for 42 percent of
total bodily injury payments. Because many workplace injury
claims were preceded by Worker Compensation payments to an
injured party, these claims are particularly susceptible to
duplication of effort and transaction costs. The Task Force
considered a number of remedies that involved the potential
shifting of costs among manufacturers, employers and employees.
Some of the considerations in this area overlap with problems
relating to cost shifting among multiple parties. In general,
the report notes that the principle of contribution among
defendants based on the relative responsibility of each may be a
useful one. It may be inapplicable in certain situations. See
pp. VII-85 - 87.
Contribution and Indemnity as Applied to
Injuries in the Workplace
An important remedial proposal that has the potential of
reducing product liability premium costs for manufacturers of
industrial equipment is to allow them contribution claims against
negligent employers where their negligence contributed to an
employee's product-related workplace accident. While this remedy
also has the potential of reducing the number of product-related
workplace accidents, a negative aspect of it is that it would
increase transaction costs. The remedy is a complicated one with
a number of alternative approaches and implications. The reader
is directed to pp. VII-89 - 95 for detailed information on the
subj ec t .
xlvix
Prohibition or Modification of Subrogation By Worker Compensation
Carriers
It would appear reasonable to reduce subrogation claims by
the amount an employer was at fault in causing an injury to a
worker. For a discussion of the variety of considerations
involved with regard to the benefits and shortcomings of this
remedy and how it might be implemented, the reader is directed to
p. VII-95 - 99.
Validation of Hold Harmless Agreements
It might be appropriate to legislatively validate hold
harmless clauses where the buyer of the product requested that it
be delivered without safety features, altered it or failed to
maintain it properly. On the other hand, hold harmless clauses
can be abused and rules regarding them should take this factor
into account.
Assuming both parties who sign the clause are insured,
legislative validation of hold harmless clauses will have little
effect on product liability rates unless insurer procedures take
the existence of hold harmless clauses into account. For details
about the benefits and shortcomings of proposals connected with
hold harmless clauses, see pp. VII-99 - IO3.
Worker Compensation As A Sole Source Of Recovery —
Abolishing the Worker's Third-Party Claim
The cost effectiveness and potential impact of Worker
Compensation as a sole source for product liability recovery have
made it an attractive one for those considering product liability
reform. It would appear that it should be considered along with
more general Worker Compensation legislative reform. In that
context, estimates can be made about the overall cost of this
proposal .
If this reform is implemented, the worker must receive an
appropriate benefit for foregoing his third-party claim. Also,
the manufacturer of a defective product should contribute to the
worker's award. A procedure for accomplishing this goal is post-
accident arbitration. Very careful thought must be given to
developing the details of that procedure. This overall remedy is
a complex one with many competing considerations, and the reader
is directed to pp. VII-103 - 112 for a discussion of the subject.
Alternative Methods for Compensating Consumer Product
Injuries : No-Fault Compensation Systems and Arbitration
No-Fault Compensation Systems
Unless the tort-litigation system can be stabilized,
pressures toward developing a no-fault compensation system in the
area of product liability will continue. These pressures may
accelerate if Worker Compensation is made an exclusive remedy for
product-related injuries that occur in the workplace.
Nevertheless, pure or modified no-fault plans do not represent an
immediate solution to the product liability problem, and these
pressures may be directed toward a practical impossibility. On
the one hand, modified no-fault plans do not appear to be
responsive to those pressures because they leave too much to
chance. On the other hand, it is uncertain whether a practical
pure no-fault first-party system can be developed -- a system
both large and small private insurers would be willing to
underwrite and service at insurance rates that would be available
and affordable for large and small businesses.
It would be useful to conduct additional research to
determine whether a practical working model could be developed
that would :
(1)
(2)
(3)
(4)
Resolve problems related to coverage.
Resolve problems of causation and other individualized
issues that have a special importance in the area of
product liability.
Resolve whether a practical product liability no-fault
system could be formulated that did not require the
formation of an independent government agency.
Resolve how the system could place proper incentives for
risk prevention on manufacturers whose defective
products caused injury.
li
No-fault systems in product liability present a very complex
topic. For a discussion of the topic and an explanation of these
specific issues, see pp. VII-202 - 239.
Arbitration
Arbitration of product liability is a remedy worth further
consideration. Of the variety of forms of arbitration,
preliminary indications suggest that compulsory non-binding
arbitration is the most appropriate for product liability cases.
Preliminary indications also suggest that product liability
arbitration is likely to bring an overall reduction of insurance
costs only if larger as well as small claims are included within
its scope of coverage.
Difficult value judgments arise in this area because a
fundamental of American jurisprudence, the jury, is being
supplanted by a smaller and more specialized group. At this
time, there is no conclusive proof that the process would be more
predictable, reduce costs, or expedite the judicial process.
Nevertheless, our analysis indicates that a properly constructed
arbitration program has an excellent potential for achieving
these goals. See pp. VII-229 - 239.
NON CAUSE-RELATED REMEDIAL PROPOSALS
MODIFICATION OF PRODUCT LIABILITY INSURANCE MECHANISMS
Introduction
It has been alleged that certain modifications of product
liability insurance mechanisms will allow the tort-litigation
system to function reasonably well and eliminate or modify the
need to enact tort law modifications that would reduce the
liability exposure of defendants. These mechanisms do not always
deliver what they promise, and the reader is directed to our
detailed discussion of this entire subject beginning at p. VII-
115.
lii
Residual
Level?
Insurance Market Mechanisms -- At The State or Federal
While it might be worthwhile to have a variety of product
liability residual insurance market mechanisms explored at the
state level where their viability could be tested (the need for
such mechanisms may also vary in different states), the Task
Force's contractor reports strongly suggested that the very
nature of product liability insurance indicates that these
mechanisms must be implemented at the Federal level. This
decision, while rooted in practicality, has very serious policy
implications and the reader is directed to p. VII-115 - 118 for a
detailed consideration of this issue.
Residual Insurance Market Mechanisms -- Under What Circumstances
Should They Be Subsidized?
As a short-range remedy, residual product iiab
market mechanisms might have to be subsidized if t
any substantial effect on product liability insur
is important to limit subsidization to insur
unavailability or major unaf fordabil ity problems,
program may establish a precedent for provid
assistance to anyone who suffers from high insur
it is necessary to subsidize residual prod
mechanisms, it would seem preferable to use publ
than compel stronger liability lines to support we
ility insurance
hey are to have
ance rates. It
eds who face
Otherwise, the
ing government
ance costs. If
uct liability
ic funds rather
aker ones.
Our discussion about the details and the circumstances as to
whether a subsidy is justified is set forth at p. VII-119.
Assigned Risk Plans
The fact that classic assigned risk plans do not include
loss-pooling mechanisms, plus problems relating to eligibility of
insureds and allocations of assignments to insurers, seriously
compromise the potential value of this remedy in the area of
product liability. See pp. VII-127 - 130.
liii
Pooling Mechanisms
It is worthwhile to explore whether a voluntary pooling
mechanism would be practicable before utilizing any mandatory
pooling system. Private insurers should give further
consideration to the formation of voluntary pools, and
appropriate government agencies might consider developing
guidelines to assist in that process. Our discussion outlines
some of the major issues that persons forming a mandatory product
liability pool must resolve. The lack of specific data about the
effectiveness of such a device in the area of product liability
made a complete evaluation of this remedy difficult. The topic
of pooling is a very complex one, and the reader should consult
pp. VII-132 - 142.
Federal Insurance and Reinsurance
It would be better to attack the causes of the overall
product liability problem than to establish a program where the
Federal government markets and sets rates in the area of product
liability insurance. See p. VII-143. The product liability
problem is a fluid one, and the need for such a program could
arise in the future.
The National Swine Flu Immunization program does not appear
to be an apt analogy for industries suffering particularly severe
insurance af fordab il ity problems. Federal reinsurance is
preferable to direct Federal insurance -- reinsurance would
involve less government activity in an area currently being
handled by the private insurance industry. Since Federal funds
would have to be used to subsidize this mechanism (or at least be
put at risk), strong policy reasons would have to support the
implementation of such a program. See p. VII-II9. The issues of
Federal insurance and reinsurance are extremely complex, and the
reader is directed to p. VII-143 - 153.
Captive Insurance Companies
Captive insurance companies provide a potential means of
relieving availability and af fordab il ity problems for some
product liability insureds. A basic unanswered question is
whether the device can be utilized by businesses that are
liv
suffering these difficulties. The answer to this question
depends, in part, on trade associations' willingness and ability
to develop captives that would meet basic insurance regulatory
requirements. Charter requirements could be drafted that would
encourage the formation of adequately capitalized small business
requirements regarding Federal income tax deductions for parent
corporations that utilize captive insurance companies. Details
on this complex subject appear at p. VII-15^ - 167.
Structured Self-Insurance Programs
Tax incentives that encourage the development of structured
self-insurance programs may benefit small businesses which have
insufficient capital to form captive insurance companies. Self-
insurance programs also may encourage product liability loss
prevention, increase the capacity of the insurance industry to
provide product liability coverage, and prevent situations from
arising where a viable product liability claim against an
uninsured small business cannot be enforced. On the other hand,
the mechanics of the remedy must be carefully designed in order
that it will not be subject to abuse. It may be appropriate for
the Department of the Treasury to undertake a full tax evaluation
of alternative forms for this particular remedy. Details about
this remedy appear at p. VII-167.
Remedies Designed to Eliminate Unsatisfied Judgments
Our data do not show that product liability judgments are
highly likely to go unsatisfied. Therefore, neither mandatory
product liability laws nor unsatisfied judgment funds may be
necessary at this time. See p. VII-172 - 187.
If there were relatively few cases where judgments against
product manufacturers were defaulted, an unsatisfied judgment
fund would be preferable to a mandatory product liability
insurance law. If the problem of default judgments in the
product liability area became more widespread, mandatory product
liability insurance would have to be given greater consideration.
From the point of view of the consumer, it is unreasonable to
permit a manufacturer to sell products when he is unable to
respond in damages if those products prove defective and injure
product users. For a discussion of the problems relating to both
Iv
unsatisfied judgment funds and mandatory product liability
insurance, see pp. VII-175 _ igY.
Ivi
Chapter I
The Nature of this Report
and the Causes of the
Product Liability Problem
THE NATURE OF THIS REPORT AND THE CAUSES
OF THE PRODUCT LIABILITY PROBLEM
INTRODUCTION
This report is the culmination of over one year of intensive
study about the topic of product liability. It describes the
causes, nature and scope of problems that have arisen in that
field. Also, it analyzes potential cures or remedies that have
been proposed as solutions for those problems. It is for the use
of the Administration, Federal and state legislators, as well as
consumer, insurer and business groups who are interested in the
topic of product liability.
The topic of product liability deals with the full scope of
how our legal and private insurance systems compensate persons
who are injured by products. It defines the responsibility of
retailers, distributors and manufacturers for products that cause
injury.
In 1975, an apparent problem (some sources said "crisis")
arose in the field of product liability. A number of
manufacturers and business periodicals alleged that product
liability insurance had become unavailable or unaf fordable . The
consequences of this situation included the possibilities that
businesses might terminate because they were unable to get
coverage; that injured persons would be unable to enforce product
liability judgments; and that manufacturers would be hesitant to
produce some products that would be useful in our society. It
was also alleged that the system of private insurance in the
field of product liability was breaking down. Finally, it was
alleged that relatively few injured persons benefited from the
system .
As will be detailed in the succeeding pages of this chapter,
in April 1976 a Federal Interagency Task Force was established by
the Economic Policy Board of the White House to study the product
liability problem and report back to it on or before December 15,
1976. A report based on that document, entitled "The Federal
1-1
Interagency Task Force on Product Liability Briefing Report," was
released to the public on January 4, 1977.
The Briefing Report was a highly condensed "still picture" of
the product liability problem as it existed in December, 1976.
It was based on preliminary drafts of three independent
contractor studies commissioned by the Task Force as well as pre-
December 1, 1976 data and information. The independent
contractor reports were in the legal, insurance and industry
areas. Since the distribution of the Briefing Report, the Task
Force staff has edited the final versions of the contractor
reports. The reports have been published and are described at p.
1-12. We have found that an overall impression of this initial
report about product liability law was a correct one--product
liability problems present a potential disruptive effect on the
economy. More importantly, the problem is not amenable to simple
remedies. It is a subtle problem in which the interests of
consumers, workers, manufacturers, distributors, retailers and
insurers have to be balanced.
This report is based on the final versions of the contractor
reports and the wide array of resources set forth later on
in this chapter. While we believe it is the most thorough study
of the topic of product liability that has been published in the
United States, we would note that it does not purport to answer
all questions relating to the product liability problem. It does
reach some important conclusions about the subject and shows
lines of study which are necessary to resolve additional matters.
As the report will show, firm conclusions about the product
liability problem are difficult to reach because data on some
major questions are limited or unavailable. Nevertheless, our
overall approach has been to reach conclusions where possible; we
appreciate the observation that there is always "room for more
study" about any topic. The product liability problem can be
alleviated in the immediate future, although the more promising
solutions will take time to shape and implement.
It is our hope that this report and our three independent
contractor reports will be of assistance to the Administration
and legislators, as well as to consumer, insurer and business
groups and to others who are interested in a balanced and sound
1-2
resolution of problems that have arisen in the field of product
1 iabil ity .
THE BASIS FOR A FEDERAL STUDY ON PRODUCT LIABILITY
We have received a number of inquiries as to why the Federal
government has studied the product liability problem. The
questioners point out that product liability has generally been a
topic of state law and that related insurance mechanisms are also
regulated by the states. The Federal government's interest in
the product liability problem arose in the fall of 1975. The
United States Small Business Administration published a report
entitled, "Product Liability: Its Implications for Small
Business." Around that time a number of manufacturers and trade
associations formed product liability committees. By January of
1976 a good number of businesses--especially in the capital goods
area--wrote the Administration and Congress that a "crisis" had
arisen in the area of product liability. They stated that the
cost of product liability insurance had increased at an
extraordinary rate in the 197^ to 1976 years, and that the number
and size of claims had also increased at unprecedented rates.
The Office of Chief Counsel for Advocacy in the Small Business
Administration received reports from small manufacturers
indicating that product liability insurance costs had become a
significant force that was jeopardizing small businesses. By the
spring of 1976, some retail and distributor groups had also
brought to the attention of the Federal government the fact that
product liability was a serious problem for American business.
In this early period some extraordinary assertions were made
that we have been unable to validate. For example, some insurers
predicted that one million product liability claims would be
filed in 1976. The insurance industry's own best estimate today
is 70,000 . Many letters told about cases where it seems
transparently unfair for the plaintiff to recover damages. We
have found that these so-called "horror stories" do not represent
the standard of the day, but they do occur on occasion. These
cases have helped generate a "crisis" atmosphere--our report will
detail why.
These early "calls for help" from the Federal government were
sometimes accompanied by proposed solutions or "remedies." Most
1-3
of these remedies focused on the tort-litigation system and
called for rules that would curtail the number of successful
product liability claims that could be brought against
manufacturers .
The initial Federal government response to these "calls for
help" was to have the Department of Commerce undertake a brief
study of the product liability problem. In March of 1976, the
Department issued a report entitled "Product Liability Insurance:
Assessment of Related Problems and Issues" (Bureau of Domestic
Commerce, 1976). That report suggested that there might be a
widespread problem with regard to both availability and
af fordabil ity of product liability insurance. It also indicated
that product liability might be placing a great financial strain
on the insurance industry. The report emphasized that its
tentative conclusions had to be qualified and requalified as more
data (or lack of data) came to the government's attention.
This initial report prompted the Administration to form an
Interagency Task Force to study the product liability problem in
more depth. The Task Force began its work in the late spring of
1976 and was asked to report to the Economic Policy Board (EPB)
by December 15, 1976. The Task Force completed that mission and
a Briefing Report (which was derived from the report to the EPB)
was released for the public's use and information on January ^,
1977. The Briefing Report set forth the Task Force's tentative
conclusions about the product liability problem .
A decision was made to edit and publish the three independent
contractor reports that had served as predicates for the Briefing
Report. The basis of that decision was to avoid duplicative and
time-consuming work on the part of legislators, state commissions
and private organizations. It was also decided to publish a
Final Report that would synthesize and evaluate the contractor
reports as well as other information that came to the attention
of the Task Force and its staff.
1-4
THE FEDERAL INTERAGENCY TASK FORCE ON PRODUCT LIABILITY-
ITS RESEARCH AND OPERATIONS
The Task Force
The Federal Interagency Task Force on Product Liability was
chaired by the Under Secretary of Commerce. In its initial work
through the publication of its Briefing Report, the chairman was
Edward 0. Vetter . The present Under Secretary of Commerce,
Sidney Harman, guided the Task Force through the publication of
its independent contractor reports and this Final Report. Policy
guidance of Task Force operations at the Department of Commerce
was also provided by the present General Counsel, Mr. C.L.
Haslam, Deputy General Counsel Mr. Homer E. Moyer, Jr., and
former General Counsel, Mr. J.T. Smith. Other members of the
Task Force included the Departments of Health, Education and
Welfare; Housing and Urban Development; Labor; Transportation;
Treasury; the Council of Economic Advisors; the Office of
Management and Budget; and the Small Business Administration.
The Consumer Product Safety Commission, which was not a member of
the Task Force, provided advice and assistance. The Department
of Justice, a member of the Task Force in its initial stages,
provided assistance in response to specific inquiries.
The Working Task Force
Each Task Force member appointed one or more persons to a
Working Task Force group. That group met every ten days in the
first six months of the study and then continued to review work
products as they were developed. Professor Victor E. Schwartz of
the University of Cincinnati College of Law, co-author of the
most widely used torts casebook in the United States, served as
chairman of the Working Task Force and provided overall direction
of the substantive content of the study.
The Staff
Staff effort for the project was carried on primarily by
persons working for the Department of Commerce. Responsibility
with regard to the preparation of this report and designing and
editing the underlying contractor reports was undertaken by
1-5
numerous individuals at the Department of Commerce. They are
acknowledged at p. vi of this report.
The staff benefited from the expertise and assistance of Mr.
Howard Clark, Special Assistant to the Administrator of the
Federal Insurance Administration of the Department of Housing and
Urban Development.
The Task Force's General Guidelines
on the Scope of the Study
In May, 1976, the Task Force decided that its study should
concentrate on product liability problems in nine specific
product lines divided relatively evenly between workplace and
consumer products. The reason for this was twofold. First, in
light of the time and resources allocated for the study, it would
not be practical to study all kinds of products. Second, it was
the Task Force's judgment that it would be sound to consider
product lines that had the potential for causing serious injury.
Also, manufacturers of most of the products selected appeared (on
the basis of anecdotal data) to have product liability insurance
problems. It was thought that through this approach, the Task
Force would be able to gauge the full impact of the problem.
Information about other products did come to the attention of
the Task Force staff. Where the information was useful it was
utilized in this report. See, e.g.. Chapter V, Table V-6 . The
products studied were:
Products with workplace impact:
1. Industrial machinery: metal cutting, metal forming,
wood-working and textile machinery;
2. Industrial grinding wheels;
3. Ferrous and non-ferrous metal castings, primarily those
used as components of capital equipment; and
4. Industrial chemicals, including both organic and
inorganic substances, used in products and in the
production process.
1-6
Products with consumer impact:
1. Aircraft components;
2. Automotive components related to safe vehicle operation,
including their manufacture and distribution, but not
their installation and repair;
3. Medical devices;
4. Pharmaceuticals; and
5. Power lawnmowers.
The Task Force also determined that the study should
concentrate on traumatic injury and not occupational disease.
The latter topic was deemed part of general studies on Worker
Compensation . Also, time considerations made this decision
necessary .
GENERAL SOURCES OF INFORMATION FOR THE STUDY
Interagency Commentary
In order to provide an ongoing focal point for the study,
Professor Schwartz developed a working paper on remedial
approaches to product liability. The first draft of that paper
was distributed to the Task Force in July of 1976. Subsequent
revised versions of the working paper were distributed, and
comments from the various agencies were synthesized and
incorporated where possible. As information from the independent
contractors and other sources (set forth below) came to the
attention of the Task Force, that original working paper evolved
into Chapter VII of this report. That chapter was then
circulated to the agencies for comments and suggestions.
Agency commentary was sought with regard to each of the other
chapters of this report. Interagency review was of substantial
benefit in ensuring both the objectivity and accuracy of the
content of the report.
1-7
Product Liability Symposium
In order to generate new ideas and perspectives about the
product liability problem, a symposium was held by the Working
Task Force in July of 1976 . The speakers at the symposium
included the Reporter of the Restatement (Second) of Torts , an
author of one of the leading casebooks and treatises on the topic
of product liability, an acknowledged academic expert on the
topic of insurance, a leading expert on no-fault compensation
systems, experienced plaintiff and defense attorneys, and
professors of engineering and economics. These individuals are
acknowledged at p. ix.
Notice in the Federal Register
In order to acquaint all persons who might be interested in
our study, a notice entitled "Scope of Research Being Conducted
on Product Liability" was published in the Federal Register on
Monday, September 20, 1976, 41 Fed. Reg. 40529 (1976). The
notice described the nature and scope of the study undertaken by
the Task Force and sought relevant information from interested
parties. It resulted in several hundred letters reaching the
Task Force. Some of these letters provided information about
remedial proposals and were utilized in Chapter VII. Others
provided information about cost and availability of insurance.
These letters were of assistance in our preparation of Chapter VI
in our specific discussion of insurance availability and
af fordabil ity .
Product Liability Advisory Committee to the
Under Secretary of Commerce
The Under Secretary of Commerce formed a special Advisory
Committee on Product Liability. Under law, the Advisory
Committee was solely responsible to the Under Secretary; however,
he shared the information provided by the Advisory Committee with
the Task Force and also coordinated the Task Force's study
efforts with this committee. While the committee members
provided helpful information and insights about the product
liability problem, it was not chartered to and did not approve or
disapprove of this report.
1-8
The committee (chaired by the Honorable Ned Price, Member,
State Board of Insurance of the State of Texas, initially
consisted of 19 members from small and large manufacturers,
distributors, retailers, insurers, consumers, labor, and attorney
groups. Seven additional persons were added in January 1977,
including a representative of the service industries. The names
and affiliations of the Advisory Committee are set forth at
p. viii of this report.
The Advisory Committee met four times during the course of
our study . The initial meeting was held on September 20, 1976.
The purpose of that meeting was to gather the perspectives of the
various interest groups about the product liability problem. The
purpose of that meeting was to obtain the members' reactions to
approximately 30 remedial proposals that had been brought to the
attention of the Task Force. The third meeting was held on
January 11, 1977. The purpose of that meeting was to gather the
committee's reactions to the Briefing Report that had been
published by the Task Force on January 4th. The fourth meeting
of the Advisory Committee was held on June 27, 1977. The purpose
of that meeting was to evaluate the Task Force's three
independent contractor reports in the insurance, industry and
legal fields. Specific questions were directed to the committee
about shortcomings in the reports. The committee members' views
were also sought as to whether the product liability problem had
changed since 1976.
Information from Industry Associations
and Interest Groups
A considerable amount of information and opinions about
product liability was supplied to the Task Force by organizations
that had an interest in the outcome of the study. Some of these
organizations were: the Insurance Services Office; the American
Insurance Association; the Alliance of American Insurers; the
Property-Casualty Insurance Council; the National Association of
Independent Insurers; the Defense Research Institute; the
Association of Trial Lawyers of America; the Risk and Insurance
Management Society; the American National Standards Institute;
the Independent Insurance Agents of America; the National
Association of Mutual Insurance Agents; the National Federation
of Independent Businesses; the National Product Liability
1-9
Council; the National Association of Wholesaler-Distributors; the
Machinery and Allied Products Institute; the National Product
Liability Council; the National Association of Insurance Brokers;
the National Machine Tool Builders Association; and numerous
other industry associations.
The National Association of Insurance Commissioners (through
its representative to the Under Secretary's Advisory Committee,
Judge Ned Price) gave its cooperation to the Task Force effort.
Also, the National Conference of State Legislatures (through its
Director of Social Services Project, Deborah Bennington) was of
special assistance to the Task Force staff in alerting it to
product liability legislative developments at the state level.
Information Regarding Consumer Perspectives
on the Product Liability Problem
The Task Force was very interested in obtaining the consumer
perspective about the nature of and solutions to the product
liability problem; this was essential if our study was to achieve
the goals of being both objective and balanced.
We have identified two principal interests of the consumer in
the product liability problem. First, the consumer has an
interest in obtaining reasonable compensation when he or she is
injured by an unreasonably unsafe product. Second, the consumer
has an interest in ensuring that the total cost of product
liability does not create an irrational increase in the price of
products. See Letter to the Task Force Project Director from
Mrs. Esther Peterson, Special Assistant to the President for
Consumer Affairs (5/3/77).
The Task Force and its staff were able to obtain some helpful
insights into the consumer perspective from the consumer
representatives on the Advisory Committee to the Under Secretary
of Commerce.
Other helpful information on the consumer's perspective
included the statement Ms. Anita Johnson, of the Public Citizen's
Health Research Group, presented at the fourth meeting of the
Advisory Committee to the Under Secretary of Commerce as well as
the statement Ms. Johnson presented before the Senate Committee
1-10
on Commerce, Science and Transportation on April 29, 1977; the
statement of Ms. Kathleen O'Reilly, Executive Director of the
Consumer Federation of America, presented to that same committee
on April 27, 1977; the statements of Mr. Ralph Nader, delivered
to the Senate Select Committee on Small Business on December 8,
1976 and to the First World Congress on Product Liability on
January 21, 1977. The First World Congress on Product Liability
also produced a helpful consumer analysis undertaken by Ms.
Benedicte Federspiel, Director of the Legal and Economic Division
of the Danish Consumer Council. See Transcript, First World
Congress on Product Liability, p. 331 (1977).
In its analysis of product liability remedies, our legal
contractor was directed to consider each from the perspective of
the injured consumer. The same pattern has been followed in
Chapter VII of this report.
Hearings Undertaken by Congress
Hearings undertaken by Congress were an excellent source to
test data and other information gathered by the Task Force. Task
Force staff members attended these hearings and the statements
submitted were given careful review. The Task Force expresses
its appreciation to the chairmen, members and staff of those
committees for their cooperation with our project.
Among the materials considered were those developed at:
Hearings conducted by the Senate Select Committee on Small
Business on September 8, 10, October 20, December 8, 1976 and
March 9, 10, and April 26, 1977 (Senator Gaylord Nelson,
Chairman); Hearings held before the Consumer Subcommittee of the
Senate Committee on Commerce, Science and transportation, April
27, 28 and 29, 1977 (Senator Wendell Ford, Chairman); and
Hearings held by the House Subcommittee on Capital, Investment
and Business Opportunities of the Committee on Small Business on
April n, 6, 18, June 6, 28, 29, July 16, 18 and 19, 1977
(Representative John LaFalce, Chairman).
The Task Force's Independent Contractor Reports
While this report made extensive use of the materials
discussed thus far, its principal resources were the three
1-1 1
independent contractor studies commissioned by the Task Force. A
brief description of those reports and their underlying data
bases follows .
The Legal Study
Description of the study
The Task Force's Legal Study was undertaken by The Research
Group, Inc. It has been published in seven volumes and is
available from the National Technical Information Service
("NTIS")
f
The purpose of the Legal Study was to provide an accurate
picture of current product liability law doctrine in the United
States, indicate data available in the legal system about product
liability, develop an independent survey of appellate cases in
the area of product liability, and analyze approximately 30
remedial approaches that had been proposed as potential
improvements in the area of product liability. In evaluating
remedies the contractor was to consider both economic and
engineering perspectives. The principal sources of information
utilized by the Legal Study were:
1. Data relating to product liability cases filed in the
United States District Courts from 197^ through 1976.
These are the only years this type of information was
accumulated. The results of this information are set
forth in Chapter II.
2. Data relating to product liability cases filed in the
State of Connecticut from 1974 to 1976. Our Legal Study
found that Connecticut was the only state that assembled
that information. The results are set forth in Chapter
II.
3. The Cook County Illinois Jury Verdict Survey of product
liability cases decided from 1970 to 1975. The results
of this survey are set forth in Chapter II.
4. A survey of 655 reported product liability appellate
cases in eight representative states. The states
1-12
included Arizona, California, Illinois, New Jersey, New York,
Pennsylvania, Texas and Wisconsin. The results of that survey
are set forth in Chapter II.
5. A review of all significant legal literature on the
topic of product liability published from 1970 to 1976.
The results of this review are reflected in Chapter VII.
Limitations on the Legal Study
The data accumulated by the Legal Study are somewhat limited
in their value. The original data collected are based on
appellate cases. It should be noted that appellate cases
represent a very small percentage of the actual cases filed.
Appellate decisions are usually the more important product
liability cases where complex legal issues must be resolved.
Nevertheless, at our Working Task Force Symposium,
representatives of both the plaintiff's and defendant's bar
suggested that appellate cases in the area of product liability
law tend to be more representative of cases as a whole than is
the situation in other areas of tort law, e.g., automobile
negligence cases.
The Legal Study did not, and was not requested to, survey all
product liability cases at the trial level. This would be an
almost impossible undertaking. In most courthouses, cases are
not categorized under the topic of product liability. This means
that all cases filed would have to be surveyed in order to
determine what occurred in the narrow area of product liability.
The cost of such an undertaking would be prohibitive.
In its remedy discussion, the Legal Study did not totally
synthesize its economic and engineering analysis with its legal
analysis--its analysis of remedies was undertaken under a very
short time frame. Nevertheless, commentary on the report
reaching the Task Force staff suggests that it is the most
complete analysis of product liability remedies that has been
published prior to the issuance of this report.
1-13
Insurance Study
Description of the study
Our Insurance Study was undertaken by McKinsey, Co. It has
been published in one volume and is available from NTIS . The
Insurance Study describes how product liability insurance is
currently provided and how insurers develop product liability
underwriting rates. The report assesses the response of existing
residual insurance mechanisms (reinsurance, surplus lines
insurance and self-insurance) to the product liability problem.
Finally, it provides the perspective of insurers on proposed
remedies for the product liability problem.
Our Insurance Study based its conclusions on:
1. Personal interviews with 1^1 members of the insurance
community who are involved in handling product liability
insurance brokerage ratemaking and underwriting.
2. A review of approximately 3,000 underwriting files on
product liability cases in six insurance companies--our
insurance contractor reported that these companies are
among the largest writers of this class of business.
3. A survey of large--over $ 1 00 , 000--claims closed in 1975,
conducted by the American Mutual Insurance Alliance.
4. Seventeen industry association surveys that were
supplied to the insurance contractor by the industry
contractor .
Limitations on the Insurance Study
In general, the Insurance Study relied on information
supplied to it by the insurance industry. It did not make a
detailed independent analysis of the profit and loss situation in
that industry. Its review of 3,000 underwriting files provided
firsthand information about ratemaking practices; nevertheless,
in some respects, the sample may not have been representative of
the entire industry. The Insurance Study only provided a limited
analysis of claims experience. This was based principally on a
l-^n
limited closed claim survey of 79 $100,000+ claims. The
insurance contractor was not instructed to undertake a closed
claim survey because one had been undertaken by the Insurance
Services Office. The results of that study were not available to
the contractor in time to incorporate in its study.
The Insurance Study's estimate of how the product liability
premium dollar is allocated by insurers may be misleading: where
the report speaks of dollars "paid to claimants," it is actually
referring to dollars insurers expect to pay to claimants. See
Insurance Study at 2-4. The importance of this distinction is
developed in Chapter V of this report.
The insurance contractor's evaluation of remedies is derived
from insurer perspectives. As a reading of the report will
reflect, those sources do not always agree on the utility of
particular remedies.
Industry Study
Description of the study
The Industry Study was undertaken by Gordon Associates, Inc.
It has been published in two volumes and is available from
10
NTIS.
The industrial contractor surveyed the claims experience of
small, medium, and large corporations in the nine product lines
selected by the Task Force for study. It also analyzed industry
association surveys that had been undertaken by organizations
cooperating with our study. Finally, the report was to consider
remedial proposals that could be generated by industry itself,
the most important of which was product liability prevention.
The Industry Study based its conclusions on:
1. An independent telephone survey of 337 firms in the
product lines selected by the Task Force. The firms
were evenly distributed among small, medium and large
corporations .
1-15
2. An analysis of the results of product liability surveys
conducted by 17 national industry associations.
3. Interviews with executives in 20 firms in high-risk
product categories. The contractor selected these
persons as a result of its consultations with industry
association personnel in our target industries.
M. A review of accident statistics from state Worker
Compensation bureaus and the Consumer Product Safety
Commission .
Limitations on the Industry Study
It should be noted that while the industrial contractor's
original data collection is described herein as a "telephone
survey," the participants were notified a reasonable period ahead
of the time that actual responses were obtained. The
participants were given a detailed questionnaire so that they
would be aware of the information that would be sought by
telephone .
This method was selected because it was thought that a higher
response rate was possible than might be obtained in a mail
survey; also, personnel from the contracting firm were able to
assist respondents with definitional problems.
It should also be noted, however, that the telephone survey
was not designed on the basis of psephological methods. The
Office of Management and Budget indicated that the information
collected would not necessarily "be representative of either the
product liability experience of an industry as a whole or the
product liability experience related to particular industrial or
consumer products." Nevertheless, the members of the Product
Liability Advisory Committee to the Under Secretary of Commerce,
who represent some of the industries most severely affected by
product liability, generally agreed that the findings of the
Industry Report were accurate with respect to the product lines
surveyed. The findings were also supported by independent
industry association surveys.
1-16
Although the industry association surveys contributed to the
analysis, it should be noted that they differed in their methods
of calculation, analytical approach and rigor. Response rates
were quite low in the majority of the stud ies--less than 20
percent in most cases. While it might be assumed that only those
with the more serious product liability problems responded, it
has been suggested to the Task Force that some companies are
reluctant to disclose information of this type because it may be
utilized against them for competitive or litigation purposes.
The industry association surveys relied on voluntary responses,
and sometimes returns were incomplete. One of the more
comprehensive surveys was undertaken by the Machinery and Allied
Products Institute . It had the best response rate, 210
responses from the 480 solicited. Twenty industry association
surveys (three more than were utilized in the Industry Report)
are reviewed in this report in Chapter III.
The Industry Report's interviews with 20 firms involved firms
which were experiencing more serious product liability problems;
therefore, they do not necessarily represent nationwide product
liability experience. Nevertheless, the interviews provided some
information that might not be obtainable by surveys.
The data reviewed by the industrial contractor from Federal
accident reporting systems and state reporting systems did not
focus specifically on product liability. For the most part, it
was information that flowed from Worker Compensation systems.
The purpose of the data collection was to provide some overall
focus on accident experience.
Although the original study plan called for the industrial
contractor to study remedies that could be implemented by
industry alone, the contractor focused on proposed solutions
which had been emphasized by persons interviewed in the course of
the contractor's study and which might be implemented in a
relatively short period of time.
The industry contractor collected a very large amount of data
in a relatively short period of time. The data were reviewed for
consistency and accuracy by the Office of Business and
Legislative Issues at the Department of Commerce.
1-17
AN OVERVIEW OF THE CONTENTS OF THIS REPORT
This chapter, Chapter I, sets forth an introduction to the
work of the Task Force and also discusses (in the next section)
the basic causes of the product liability problem.
Chapter II, entitled "Product Liability: A Legal Framework,"
is derived from our Legal Study. It presents an overview of
product liability law and focuses on five major issues that have
been of major importance in the development of that law. The
chapter also reviews the product liability data presently
available from the legal system and sets forth the results of the
independent survey of product liability appellate cases
undertaken by our legal contractor. The chapter provides a
picture of the present rules of law that have been, in part, a
cause of the product liability problem.
Chapter III, entitled "The Impact of Product
Selected Industries," is derived from our Industry
industry association surveys. It shows the impac
liability on the target industries selected by the Ta
synthesis of its findings is presented in the beginni
a more detailed discussion of the results follows,
discussion of the differences between what was
telephone survey and the industry association surveys
by outside groups. Three additional industry associa
that were not available to the industrial contractor
in Chapter III .
Liability on
Report and
t of product
sk Force. A
ng, and then
There is a
shown by our
undertaken
tion surveys
are analyzed
Chapter IV, entitled "Product Liability Prevention
Techniques," shows what we have learned about the implementation
of product liability prevention techniques by manufacturers in
our target industries. It also discusses the steps taken by
insurers toward assisting insureds with the development of
product liability prevention programs. Finally, the chapter
provides some analysis of how product liability prevention
programs might be used in the future.
It should be noted that the impact of the tort system on
product liability prevention is discussed in Chapter VI and that
potential legal remedies dealing with product liability
1-18
prevention are set forth
report .
m
Chapter VII, Section V of this
Chapter V, entitled "Product Liability Insurance," discusses
the role product liability insurers have played in resolving or
causing the product liability problem. It explains the nature
and scope of the product liability insurance policy. It
describes the product liability insurance underwriting process
and ratemaking procedures. The chapter also analyzes the recent
profit and loss situation in the property and casualty insurance
industry. It discusses how insurance market mechanisms such as
reinsurance and excess lines insurance are alleviating the
product liability problem. Finally, it sets forth conclusions
regarding the role of the insurance industry in regard to the
product liability problem and indicates how the situation might
be improved .
Chapter VI, entitled "Major Impacts of Product Liability,"
provides a summary of our major findings: it attempts to
synthesize what our legal, insurance and industry data and other
information show. The chapter summarizes for policymakers both
the positive and negative aspects of the current product
liability system. It discusses the impact of product liability
on the af fordabil ity and availability of insurance; persons
injured by products; Worker Compensation systems; survival in
business; and product liability prevention techniques.
Chapter VII,
Product Liability,
liability remedies
Force. Obviously,
remedial approach
be exercised as to
chapter considers
1 iabil ity rules ,
responsibility of
proposed modificati
relating to damag
alter the manner in
chapter considers
defendant's right a
remedies relating
entitled "Remedial Approaches in the Field of
" analyzes the more significant product
that were brought to the attention of the Task
the Task Force could not analyze every
brought to its attention; some judgment had to
which were the more important. First, the
proposed modifications of some basic product
for example, rules that relate to the
a user of a product. Second, it considers
ons of some basic product liability rules
es. An example would be proposals that would
which attorneys are compensated. Third, the
proposed product liability rules relating to a
gainst third parties. This section focuses on
to injury in the workplace, and the
1-19
relationship between the injured employee, his employer, and the
manufacturer of the product that injured the employee. Fourth,
the chapter analyzes proposed modifications of product liability
insurance mechanisms. Here assigned risk pools, reinsurance,
direct Federal insurance, mandatory and voluntary pooling,
captive insurance companies and structured self-insurance
programs are considered. This section also focuses on legal
means whereby insurers or the government would be required to
assist manufacturers in the development of product liability
prevention programs. The section also analyzes remedies designed
to eliminate unsatisfied judgments. Fifth, the chapter evaluates
alternative methods for compensating consumer product injuries.
There is a discussion of both no-fault compensation systems and
arbitration. The major conclusions of the chapter are
synthesized and summarized in a final section.
Chapter VII has been placed at the end of this report because
it is based on considerations in all the prior chapters.
Nevertheless, legislators or others who are interested in reform
proposals and want an immediate view of the Task Force's
suggestions should read the summary of that chapter (pp. VII-
242) .
THE CAUSES OF THE PRODUCT LIABILITY PROBLEM
Introduction
The Task Force's Briefing Report identified three principal
causes of the product liability problem: liability insurance
ratemaking procedures, the tort-litigation system and
manufacturing practices. Little has changed in the intervening
months to alter our perspective on this issue. Therefore, our
discussion of the causes of the product liability problem will
closely parallel the Briefing Report. Nevertheless, where new
information has come to the attention of the Task Force or its
staff, it will be identified. More importantly, unlike the
Briefing Report, this document will provide a detailed analysis
of remedies that purport to address each of these causes.
We are still unable to rank these causes in a meaningful
hierarchical chain. Our data simply do not permit a conclusion
that one cause is more important than the other. On this issue,
1-20
we doubt whether data could be
that goal .
obtained that would accomplish
Nevertheless, we have observed a tendency for each group that
has a special interest in the product liability problem to assert
that "the cause" lies in conduct unrelated to their own group.
For example, most insurers contend that the dramatic increase in
product liability insurance premiums is caused by the tort-
litigation system. On the other hand, the plaintiff's bar
asserts that the cause lies in insurer ratemaking practices and
in the failure of manufacturers to use proper product liability
prevention techniques. Some manufacturers, in turn, have
asserted that the problem has been caused by an irresponsible
plaintiff's bar: it is alleged that plaintiff's attorneys bring
frivolous claims and have brought about a system of tort law that
makes product liability prevention useless as a means of guarding
against 1 awsui ts .
It is our view that the product liability problem is based on
a confluence of causes and that it will only be resolved if each
cause is properly addressed.
Aside from the three principal causes, there are other causes
that may have contributed to the problem. While we have
discussed those causes herein, they are generally not matters
that can be resolved by the remedial proposals discussed in this
report, e.g., inflation and the increase in number and complexity
of products.
Discussion of the Causes
Cause ^: Liabil ity Insurance Ratemaking Procedures
The Briefing Report identified liability insurance ratemaking
practices as a cause of the product liability problem. As our
data set forth in Chapters III, V and VI show, there have been
very substantial increases in product liability insurance
premiums in our target industries during the years 197^-1976. We
have received anecdotal data that the same has been true for
certain industries that were not included in our study, e.g..
ladder manufacturers, manufacturers of sporting goods.
1-21
On the other hand, there have been no published data that
show a similar nationwide increase in the average size of the
verdicts rendered against defendants in those industries. Our
data do suggest that there has been a substantial increase in the
number of pending claims, and our legal contractor found on the
basis of limited data collected in the legal system that the
average amount of product liability judgments did increase during
the I97O-I975 period. Nevertheless, these increases did not
appear to the contractor to be large enough to support insurance
company premium increases.
In the overwhelming majority of cases, insurance company
sources did not rely on data (either in terms of number or size
of claims) to support premium increases that occurred in the
197^-1976 period. Thus, at congressional hearings held to
determine the role of insurer ratemaking practices in regard to
the product liability problem, James A. Kassel, Vice President of
the Hartford Insurance Group stated, "the paucity of information
we have been able to report to you is an embarrassment..." See
Hearings before the Subcommittee on Capital, Investment and
Business Opportunities, House Committee on Small Business, 95th
Cong., 1st Sess., Transcript, p. 372 (June 28, 1977). Mr. John
K. Dane, Vice President of Liberty Mutual Company, also indicated
that "a large part of products liability insurance had been
priced in such a way that no ratemaking or claims data were
generated..." See Hearings before the Subcommittee on Capital,
Investment and Business Opportunities, supra at p. 431.
This testimony tends to confirm a finding of our insurance
contractor: it found that neither insurance company
representatives nor the Insurance Services Office (the principal
ratemaking organization for the insurance industry) have a
significant amount of data on the percentage of "pure" product
liability experience losses. For the most part, product
liability experience, most of which is composite-rated, loss-
1 2
rated, or large (a) rated , has not been separately recorded.
Nevertheless, based on the limited statistical information
that was available, the insurance contractor concluded that
insurance companies in the 1971-1974 period "lost money" on
product liability business. The insurance contractor based its
finding on a showing that "incurred" losses grew more rapidly
1-22
than premiums. As Chapter V explains, incurred losses do not
equal paid losses; rather, that figure includes paid losses,
amounts "reserved" against pending claims and also amounts
"reserved" against incurred but not reported claims. As Chapter
V shows, insurance industry regulators do not systematically
determine whether amounts reserved in incurred loss figures in
the area of product liability turn out to be too high. This can
occur not only when the reserve estimate is too high, but also
when the interest or capital gains that may flow from reserves is
substantial. This topic is developed in Chapter V at p. 3^.
A number of representatives from the insurance industry have
said that its product liability rates were set too low in the
1971 through 197^ period. In that regard, insurance industry
spokesmen have frequently observed that product liability
insurance was "practically given away" in that period of time as
part of a larger insurance package. See Statement of James A.
Kassel , Hearings before the Subcommittee on Capital, Investment
and Business Opportunites , supra at 371. Consumer groups find
this explanation unsatisfactory. They argue that insurance
companies aggressively sought product liability business in the
late 1960's and early 1970's in order to generate income for
investment purposes. When the "bear market" struck in 1973-197^
and the insurance industry took heavy losses, thus reducing
policyholder surplus, this (it is argued) caused a shortage in
underwriting capacity. Thus, stock market losses, together with
underwriting losses, led to the considerable increases in product
liability premiums.
On the other hand, insurers argue that in the early 1970's,
they were not aware that product liability would become a
substantial problem. Nevertheless, our Legal Study shows that
strict product liability first came into the law as an important
matter with the publication of the Restatement (Second ) of Torts
Section 402 A in 1965. By 1971 and 1972, a number of major
states (e.g. , California, Illinois, Michigan, New Jersey) had
adopted strict product liability theories. Nevertheless, this
did not alter the product liability insurer practice of combining
product liability coverages in Comprehensive General Liability
packages. This practice, along with uncertainties in insurer
reserving practices, makes it almost impossible to obtain an
accurate profit and loss picture for product liability insurance.
1-23
As indicated in Chapter V, we have been unable to make a finding
as to whether product liability premium increases were, as a
whole, justified in the 197^-1976 period. Nevertheless, all of
the evidence reviewed by the Task Force confirms suspicions of
the director of McKinsey, Co., our insurance contractor, that
some insurers engaged in "panic pricing." See Hearings before
the Subcommittee on Capital , Investment and Business
Opportunities, supra at p. 279 (June 6, 1977). It also confirmed
his observation that product liability rates are "effectively
uncontrolled." See Hearings before the Subcommittee on Capital,
Investment and Business Opportunities, supra at p. 286 (June 6,
1977). In spite of all this, a number of insurer sources contend
that "notwithstanding the shortcomings of our present data base,
for many purposes insurer pricing methodologies and prices for
products liability are by no means invalid, useless, or in any
way lacking in integrity.... a better data base will result in
more reliable pricing, but the absence of that base does not mean
that our insurer pricing is wrong." See Remarks of James A.
Kassel , Hearings before the Subcommittee on Capital, Investment
and Business Opportunities at p. 372 (June 28, 1977).
The absence of data appears to make it impossible to confirm
whether insurer price increases in the area of product liability
are justified. As insurers appreciate, product liability
premiums cannot be utilized to recoup past losses. Nevertheless,
it would appear that some insureds may be paying a higher premium
than data would justify, and others may be paying a lower
premium. The burden of proof would appear to fall on the
insurers to justify increases of 200, 300, or 400% in premiums
where they do not have data based on claims experience that would
suggest that increases of this type are proper. Our conclusions
as to how product liability ratemaking procedures might be
improved and this cause of the product liability problem
alleviated appear in Chapter V at p. 48.
Cause II : Manufacturing Practices
As the Briefing Report indicated, a review of 655 appellate
cases by our Legal Study produced some evidence that rart of the
product liability problem stems from the fact that some
manufacturers are producing unreasonably unsafe products. These
products are mismanuf ac tured--they suffer from defects in
1-24
construction. The products are not in accord with the
manufacturer's own specifications. In that connection, our legal
contractor noted that in 140 of the 655 appellate cases it
sampled, plaintiff relied solely on the fact that there was a
defect in the manufacture of the product that caused the injury.
Plaintiff was successful in 58 of those cases, was unsuccessful
in 36 and 46 were remanded. A review of the cases strongly
suggests that careful product liability prevention techniques in
the area of quality control would have eliminated the basis for
many of those lawsuits.
The same source showed that plaintiff was less successful
when he alleged that it was a defect in design that caused his
injury. Here, product liability prevention techniques might have
prevented some of the suits or at least rendered them
unsuccessful. On the other hand, some cases reflect that juries
on occasion are allowed to render a "hindsight judgment" about
whether the manufacturer designed his product carefully. Product
liability prevention would not have prevented those cases.
Our Industry Survey suggests that a number of manufacturers
(especially small businesses) do not have planned product
liability loss prevention programs in the basic areas of design
research and quality control. See Chapter IV at p. 3 - 4.
The Legal Study showed that some manufacturers do not provide
adequate instruction about the dangers that may spring from their
products. Product liability prevention procedures have advanced
to a point where consumer product misuses may be anticipated
before they occur. Nevertheless, a few courts have applied
principles of hindsight in this area and appear to require
manufacturers to foresee the unforeseeable.
Our Industry Study suggests that some manufacturers do not
see a direct relationship between product liability prevention
and insurance premium costs. If they did see this relationship,
there would be more incentive to give more attention to product
liability prevention. We discuss this issue and remedies that
might improve the situation in Chapter VII at p. 238.
It has been suggested that insurers be required to provide
product liability prevention advice to their insureds. We
1-25
discuss the benefits and shortcomings of this remedy in Chapter
VII at p. 177.
Finally. it has been suggested that the government might
provide additional information, data or actual personnel
assistance to manufacturers to aid them in implementing product
liability prevention techniques. Our discussion of this remedy
and its implications are set forth in Chapter VII at p. 183.
It does not appear that industry is becoming less interested
in product liability prevention techniques. In point of fact,
limited data suggest the opposite conclusion. See Chapter VI at
p. 47. Nevertheless some companies--espec ially some smaller
ones--are unable to devote adequate resources to product
liability prevention programs and do not receive assistance from
their insurance companies in regard to this problem. It would
appear that the overall product liability problem would be
reduced in the long run if improvements could be made in this
area .
Cause III : The Tort -Litigation System
Insurers and many manufacturers have strongly argued to the
Task Force that changes in the tort-litigation system have been
the primary cause of the product liability problem. It is
alleged that the system has brought about an avalanche of claims,
unreasonably high verdicts, and a situation where persons recover
damages simply on the basis of showing that a particular product
injured them.
Data sources conflict as to whether the number of claims
filed has increased substantially in our target industries over
the total I97O-I976 period. Our industrial contractor's
telephone survey does show that the number of pending claims has
increased each year. As has been indicated, our data are much
less certain in regard to whether there has been a similar
increase in the size of judgments or verdicts. Our Legal Study's
review of 655 appellate cases does show an increase. A survey
conducted of product liability cases in Cook County Illinois from
1970-1975 does show a substantial increase in the size of awards.
See Chapter II at p. 46. It is also relevant to note that our
industrial contractor indicated that data collected from public
1-26
accident reporting mechanisms provide some indication that the
number of product-related injuries in most of our target groups
has not increased as rapidly as the number of product liability
claims. See Chapter VI, P. 39. _.
Limited data show that plaintiffs do not win every litigated
case. Our Legal Study's sampling of appellate cases shows that
the defendant "won" in approximately 49% of the cases. The Cook
County Illinois jury survey of product liability cases from 1970-
1975 show that the defendant won in approximately 65% of the
cases. . Nevertheless, data from the Insurance Services Office
suggest that 96% of product liability cases are settled before
court verdict. In the majority of cases that are settled,
plaintiff receives some award.
Our Legal Study's review of the tort-litigation system
suggests that it does not, in general, impose absolute liability
on manufacturers of products. In many situations, a jury is
asked to balance the economic burden on the manufacturer to
produce a safe product against the probability that the product
may cause injuries and the severity of those injuries. In light
of these factors, the jury is asked to determine whether the
product is reasonably safe. Nevertheless, there are cases which
appear to approach a system of absolute liability. Some
appellate courts do not view product liability law as a means of
apportioning responsibility between parties, but as a
compensation system. These courts come very close to holding
that the tort-litigation system should provide a recovery for
persons who prove that they were injured by a product. These
courts believe that the defendant is in a better position to
"distribute the cost of the risk" than the plaintiff is to bear
it.
While these cases appear to be relatively few in number,
insurers have regarded them as quite important in their pricing
practices. As the Briefing Report observed, insurance company
ratemaking is an area where "perceptions of reality become as
important as reality itself..." Briefing Report at p. 14.
Even if insurer ratemaking practices were substantially
improved, the spectre of these cases could still serve as an
arguable justification for increasing premiums. If one state
1-27
court reaches a decision of this type, others could follow in the
future. It is almost impossible to predict when courts will
change product liability rules and broaden the exposure of
insureds .
The instability in product liability law has increased costs
apart from verdicts and settlements. It has created a climate
where it may be rational for a plaintiff's lawyer to bring a case
although existing rules suggest that it cannot be won. It
apparently has increased defense and investigation costs.
Preliminary data from the Insurance Services Office indicated
15
that for every dollar paid to a claimant, an additional $.42 is
expended in defense and other loss adjustment procedures.
Individual state modifications of the tort system may not
alleviate this problem. Unlike medical malpractice, attorney
malpractice and municipal liability problems, product liability
is nationwide in scope. This is because most products are
distributed in a broad number of jurisdictions. Thus, product
liability insurance rates are made on a nationwide, not a local,
basis. Where product liability insurance costs are passed on in
the price of a product, consumers in some jurisdictions may pay
for legal interpretations that are rendered in others.
Among the primary areas of uncertainty in basic product
liability laws are the rules relating to the responsibility of
the manufacturer in designing his product and warning about
hazards connected with that product. As a practical matter,
there is no way a manufacturer can always know "in advance"
whether he has designed his product properly or given proper
warnings about hazards connected with the product. Also, in most
situations there is no strict cut-off point where a manufacturer
is no longer subject to liability for an injury caused by a
product. Rules are also in flux in regard to the responsibility
a product user should bear for his own misconduct.
We have concluded that this cause of the product liability
problem can only be addressed by a careful review of product
liability law as a whole. One must re-examine the basic standard
of responsibility for product users and product liability
defendants. One must also examine rules relating to damages and
how costs are allocated among multiple defendants. It is also
1-21
important to discern whether no-fault compensation systems can be
utilized in the product liability field. These systems have the
potential of providing a means of compensating victims of
product-related injuries while reducing overall transaction costs
that arise out of such payments. Finally, there is a need to
explore suggestions that the product liability injury that occurs
in the workplace might be handled differently from consumer
product injuries. In Chapter VII, we address these topics and
suggest ways in which this cause of the product liability problem
might be reduced or eliminated.
Other Causes
There are a number of other causes of the product liability
problem that this report does not specifically address. These
causes do not appear to be as significant as those identified
above. The causes include:
(1) Inflation . When a product liability claim is made for
loss of wages and medical costs in 1976, it will be
higher than a similar claim made in 1970 because of
inflation. Also, legal defense and investigation costs
have increased in this period. There are no data
available that suggest whether the average product
liability judgment has risen at a rate that is higher
than inflation over the past five years. Some limited
surveys suggest that this may be true. We do know that
the cost of liability insurance for many companies has
risen at a rate that is substantially higher than
inflation for the years 197^ through 1976. The causes
of and cures for inflation go beyond the scope of this
report .
(2) Consumer and Worker Awareness . Anecdotal data suggest
that both consumers and workers are now more aware of
their right to bring a product liability suit than they
were ten years ago. In that connection, some of the
increases in the number of claims may relate to injuries
from defective products that would not have resulted in
lawsuits in the past. This is one possible explanation
of the apparent increase in the number of product
1 iabil ity claims .
1-29
No one has suggested that a solution to the product
liability problem is to make consumers or workers less
aware of their rights. On the other hand, some have
asserted that the situation has resulted in some
attorneys "playing upon" consumer awareness. It is
alleged that the result is that frivolous claims are
brought. We discuss proposed remedies that may thwart
the bringing of frivolous claims in Chapter VII at p.
62.
( 3 ) Increases in the Number and Complexity of Products .
Anecdotal data suggest that in some product lines there
has been an increase in both the number and complexity
of items manufactured. Obviously, this will result, in
the long run, in an increase in the number of product
liability claims. We have been unable to quantify this
cause of the product liability problem, and no one has
suggested a remedy for it. It would seem, however, that
continued emphasis on product liability loss prevention
may serve as a counterweight to this particular cause of
the product liability problem.
(^) Product Misuse . According to a recent survey of large
product liability claims by the Alliance of American
Insurers, misuse and alteration of products by product
users is an important causal factor in product-related
accidents. This survey was based upon very limited
data; nevertheless, our Legal Study's review of case
law reflects that product misuse is a factor in bringing
about product-related injuries. Even where a
manufacturer makes a reasonable attempt to instruct
users about dangers connected with products,
instructions are sometimes ignored or unforeseeably
misinterpreted .
The insurer and manufacturer groups that have brought
this matter to our attention suggest that the problem of
unreasonable product misuse be dealt with by barring or
limiting a plaintiff's claim. See Chapter VII at p. 37-
Of course, there is no assurance that these approaches
would prevent unreasonable product misuse. One means
whereby this cause might be addressed is through
1-30
continued consumer education by manufacturers, insurers
and government. Nevertheless, in the time allotted for
our study, we have not developed specific means v;hereby
this education could be increased or made more
effective .
1-31
-1
See Statement
Capital, Investmen
Committee on Small
2
Briefing Repo
Technical (Departm
National Technica
Road , Spr ingf ield ,
When ordering repo
accession number,
NTIS) should be
is 262 515 and its
^Initially ei
contractor, with t
power lawnmowers.
The Working
has pointed out th
may grow as mor
diseases, both tho
that are affected
NOTES TO CHAPTER I
of Mavis A. Walters before the Subcommittee on
t and Business Opportunities of the House
Business (June 6, 1977) .
rt. Interagency Task Force on Product Liability
ent of Commerce, 1/M/77). Published by the
1 Information Service, 5285 Port Street Royal
Virginia 22161 (Attention: Sales Desk),
rts reference should be made to the appropriate
and a check in the proper amount (made out to
enclosed. The Briefing Report Accession Number
price is $4.50.
ght product lines were selected. The industry
he approval of the Task Force, added a ninth,
Task Force member from the Department of Labor
at health-related product liability problems
e knowledge is gained about the etiology of
se that are occupationally related and those
by environmental problems.
^The papers from that symposium will be published in a
supplement to this report.
Transcripts of the meetings are available at the Department
of Commerce.
7
'Copies of the reports may be obtained from NTIS . For
general information on ordering reports see note 2, supra . Legal
Study: Accession Number P.B. 263-601, price $31.25. A one-
volume Executive Summary has also been published: P.B. 265-450,
price $6 . 00.
^Accession Number P.B. 263-600, price $9.00 (The address for
ordering is listed in Note 2, supra ) .
g
Undertaken by the Alliance of American Insurers.
^"^Accession Number P.B. 265-542, price $21.25 (The address
for ordering is listed in Note 2, supra) .
1 1
Letter from Roye L. Lowry, Clearance Officer, Office of
Management and Budget, to Mr. Robert P. Jordan, Clearance
Officer, Department of Commerce (11/3/76).
1 2
Large (a) rated classifications are those for which
insufficient data are reported to calculate a rate through
actuarial techniques.
1-32
13
73
% of bodily injury and 83% of property damage claims are
without lawsuit, representing 7% and 33% respectively of
made .
ported losses in the insurance industry are often
y underwriting losses. There is a distinction between
y underwriting losses and overall underwriting losses,
tinction is developed in Chapter V at p. 37.
e Task Force staff has been informed by a representative
nsurance Services Office that the Final Closed Claim
ill show this figure to be $.35.
settled
payments
14
statutor
statutor
This dis
^^Th
of the I
Survey w
1 f\
Seventy-nine cases studied where a claim was in excess of
$100, 000.
1-33
Chapter II
Product Liability —
A Legal Framework
INTRODUCTION
This chapter has two principal parts. Part I is derived from
our Legal Study's description of some of the more significant
aspects of current product liability law. It is by no means a
complete picture: it would take several volumes to even begin to
accomplish that goal. Rather, its purpose is to present an
overview of what the Task Force found to be one of the causes of
the product liability problem - the current tort-litigation
system .
We have selected five specific areas of product liability law
for discussion in this chapter. They were selected on the basis
of information gleaned from our Working Task Force Symposium,
letters to the Task Force and independent research by the Task
Force staff. Aside from presenting a picture of five important
areas of product liability law, these topic areas also serve as a
resource for discussion of some of the remedial proposals set
forth in Chapter VII.
Thus, the first topic area, a defendant's duty to design its
product properly, and the second topic area, a defendant's duty
to warn users or consumers about hazards connected with the
product, serve as a resource for our remedy discussions of the
basic standard of responsibility in product liability cases, p.
VII-14, modification of rules relating to the age of products, p.
VII-20, a duty limitation for unavoidably unsafe products, p.
VII-29 and the development of predictable legal standards for
product liability cases, p. VII-33. The third topic area, the
burden on the user or consumer -- how his conduct will affect his
claims -- serves as a basis for our discussion of remedies
relating to the problem of product misuse, p. VII-47 and the
problem of plaintiff's contributory fault or assumption of risk
at p. VII-51 .
The fourth topic area, the defendant's ability to apportion
risk and the fifth, product liability law in the workplace, are
reservoirs for our remedy discussions concerning modifications of
product liability law relating to a defendant's right against
third parties -- the problem of the workplace injury at p. VII-
85.
II-1
Part II of this chapter sets forth our legal contractor's
review of product liability data that have been derived directly
from the legal system. The first section describes what could be
found about product liability claims and settlements from legal
resources. This includes a description of data compiled by the
Director of the Administrative Office of the United States
Courts, by the Judicial Department of the State of Connecticut
(the only state to collect and report data specifically on
product liability cases), the Illinois Jury Report Survey and the
Kansas Trial Lawyers' Association survey of product liability
cases tried in Kansas City from 1967-1975.
The second portion of this section sets forth the results of
a product liability survey undertaken by our legal contractor.
The contractor surveyed 655 appellate cases from eight
representative states. The basis for the selection of those
states is set forth on p. 47.
While appellate cases
transpires at the trial lev
attorneys at our Working
product liability appellate
"what goes on" at the trial 1
This is because product liabi
is more likely to be an appea
have utilized these data, alb
we set forth our ultimate
discuss remedies. We have pr
make additional use of it.
do not necessarily reflect what
el, both plaintiff and defendant
Task Force Symposium advised us that
cases are more representative of
evel than in other areas of the law.
lity law is still in flux and there
1 when verdicts are substantial. We
eit cautiously, in Chapter VI where
findings and in Chapter VII where we
esented it here so that others may
We did not have the resources or time to survey product
liability cases at the trial court level. We have been advised
that such an undertaking would be complicated and very costly,
since most trial courts do not separate "product liability" cases
from other general liability cases.
As other portions of the report show, however, we have been
able to glean some picture of what is "happening" at the trial
court level. This was accomplished by our industrial
contractor's survey of the claims experience of 337 corporations.
We were also able to obtain some picture of claims at the trial
court level from surveys undertaken by 20 trade associations,
1 1 -2
insurance groups and others. The trade association surveys are
set forth in Chapter III and the insurance group surveys
including the Insurance Services Office's preliminary closed
claim survey are discussed in Chapter V.
AN OVERVIEW OF PRODUCT LIABILITY LAW
Introduction
As one reviews the product liability cases from the past two
decades, it is clear that courts did not intend to create a
product liability problem. Rather, they were attempting to weed
the law of antiquated doctrine or stumbling blocks that appeared
to deprive injured plaintiffs of their right to recover against
manufacturers of defective products. For many decades an injured
consumer was, in theory, entitled to damages when the product
that injured him was negligently manufactured. Often, however,
the plaintiff was unable to show that the defendant failed to act
as a reasonable manufacturer, or he was barred because he was
contr ibutor ily negligent with respect to the product. Sometimes
his claim failed because he was unable to reach the manufacturer
of the product by judicial process. Instead, he was only able to
sue the retailer or distributor of the product and was unable to
prove negligence against those parties.
An alternative approach to negligence was the law of
warranty. Here plaintiff only had to show that the product was
unreasonably constructed or designed in regard to its intended
use. But in cases other than those dealing with foods or
cosmetic preparations, the courts usually required that the
plaintiff be in privity of contract with the defendant.
Therefore, if a non-purchaser was injured, his claim had to be
based on negligence. The privity requirement was so important
that it was commonly referred to as a "citadel."
"The Fall of the Citadel," according to the late Dean
Prosser, occurred on May 9, I960, when the Supreme Court of New
Jersey announced the decision in Henningsen v. Bloomfield Motor s ,
Inc . The Henningsen court held the manufacturer and dealer of a
defective automobile liable for a breach of implied warranty
without any showing of negligence and without privity of
contract. The basis of the decision was that when a seller
II-3
places a defective product into the stream of commerce, the loss
should fall on that seller, who is in a position to control the
danger and to distribute the losses equitably, rather than on the
innocent plaintiff, who cannot control the danger and who has
less ability to distribute the loss.
3
Greenman v. Yuba Power Prod uc ts , Inc . , a 1963 decision of
the Supreme Court of California, represents the next significant
development in the evolution of a cause of action other than
negligence in product liability cases. While Henningsen was
based on the contractual theory of breach of implied warranty,
the Greenman decision rested in tort--the cause of action was one
of strict tort liability. Thus, although the rationale of the
Greenman decision was congruent with that of Henningsen , the
theory of recovery differed.
The court in Greenman recognized what had occurred in a long
series of cases that ended with Henningsen . A doctrine that had
in the twentieth century been associated with contracts
(warranty) was being utilized to create a new cause of action in
tort. The Greenman court, by identifying the true legal basis
for the cause of action, hoped to bring more rationality to the
system. For example, by labeling the product liability claim one
of tort rather than warranty, technical requirements (such as the
commercial code's requiring that a notice to a seller be supplied
within a reasonable time after the buyer discovers a defect)
could be avoided when they were inappropriate.
Henn ingsen and Greenman were important building blocks in
establishing a new cause of action in product liability cases.
Under the reasoning of these decisions, the plaintiff was no
longer required to prove negligence on the part of the
manufacturer or seller in order to recover for injuries arising
through the use of a defective product. Instead, the focus was
shifted from the conduct of the manufacturer to the performance
of its product. If the product proved to be defective, then the
parties responsible for placing the product into the stream of
commerce were liable to the plaintiff for the injuries caused by
the product.
Over time most courts extended the rationale of these cases
to both retailers and distributors. It would appear that strict
II-M
liability may strike at these groups more harshly than
manufacturers: retailers and distributors are often in a
situation where they have neither the ability nor the opportunity
to discover or correct defects in a product. In point of fact,
case law suggests that retailers and distributors are usually
able to transfer the cost of a product liability judgment back on
to the manufacturer. Nevertheless, it has been reported to the
Task Force that these groups are still subject to substantial
defense costs. Courts extended strict liability to retailers and
distributors, in part, on the assumption that those groups would
place pressure on the manufacturer to produce safe products.
Courts also believed that retailers and distributors might be
more accessible to suit than manufacturers.
Although the Henningsen , Greenman and other early strict
product liability cases dealt with consumer goods, courts soon
applied the same theory to workplace injuries. Some have argued
that there was less need to have strict liability with respect to
product-related workplace injuries. The basis for this argument
is that the injured worker often has recovered medical costs and
a percentage of his loss of earnings through Worker Compensation,
whereas the consumer (unless successful in a product liability
action) has often obtained no compensation whatsoever.
The protection established by Henn ingsen and Greenman was
also extended beyond users and consumers of products to all
persons who might foreseeably be injured if a product misfired.
Finally, the Henningsen and Greenman cases (which dealt with
injury to the person) were extended to situations where there had
been property damage. To date, most courts have drawn the line
at that point and decline to apply strict liability in tort where
there has been pure economic loss.
As far back as 1965 with the promulgation of Section 402A of
the Restatement (Second) of Torts , it was hoped that reasonably
uniform standards might evolve for strict product liability law.
Nevertheless, these hopes have not borne fruit. To illustrate
this fact we will examine some of the more important doctrinal
areas where diversity of view has arisen. A common theme in each
of these areas is a difference in perspective (identified in the
Task Force's Briefing Report) between courts who view product
II-5
liability law as a means of apportioning responsibility based on
fault and those who assume that this area of law should be a
compensation system for persons injured by products. See
Briefing Report at p. 13-
Some Major Issues in Product Liability Law
A Manufacturer's Duty to Design Its Product Properly
Introduction
While most courts agree that the duty of the manufacturer is
to design a product that is not "defective," no satisfactory
definition of the term "defect" has been articulated. Michael
Hoenig has recently remarked, in fact, that "[w]hat constitutes a
defect is no clearer today than it was a decade ago when Section
402A of the Restatement (Second ) of Torts was published." The
term is particularly difficult to define in connection with cases
where the alleged defect is one of design. On the one hand, in
cases involving manufacturing defects, the plaintiff need merely
illustrate that the performance of the product was deficient; on
the other hand, in cases involving alleged design defects, the
plaintiff must impugn a conscious design choice of the
manufacturer. Courts have had problems in both defining and
applying the so-called strict liability standard where plaintiff
has alleged that a design was defective.
11
Defectiveness and Strict Liability
In the 1963 case of Greenman vs. Yuba Power Products , Inc
where the underlying rationale of strict liability was set forth
by Justice Traynor of the Supreme Court of California, it was
held that a manufacturer is strictly liable when its product
"proves to have a defect that causes injury to a human being."
The Greenman court did not undertake, however, to define the
meaning of defect. In 1965, when the Restatement (Second ) of
Torts was published, it was postulated in Section 402A that one
who sells any product in a "defective condition unreasonably
dangerous" is subject to liability for physical harm caused by
the product, even though the seller exercised all possible care
in preparing and selling the product. Thus, notwithstanding the
fact that the court in the Greenman case held the manufacturer
II-6
liable for any product which proved to have a "defect," the
Restatement used the differently-worded standard of a "defective
condition unreasonably dangerous."
The term "unreasonably dangerous" generated little discussion
in the years immediately after the inception of Section 402A.
Those courts, including the Supreme Court of California, which
applied the strict liability doctrine, often spoke of the
Greenman standard and Section 402A as basically synonymous. It
was not until the decision of the Supreme Court of California, in
Cronin v. J . B. E. 01 son Corp . , that a controversy was created.
The Cronin case attempted to analyze the two standards and found
the Greenman formula to be preferable because the "unreasonably
dangerous" element had the effect of introducing negligence-
related considerations into a strict liability case. The court
held that the plaintiff need not show a product to be
"unreasonably dangerous" in order to recover on a strict
liability theory.
The approach advocated by the Cronin cour t--allowing the
issue of defect to be decided in an "intuitive" manner--has
created great confusion and has met with widespread resistance.
For example, this approach has been compared to instructing the
jury in a negligence case that the defendant is liable if he
breached a duty owed to the plaintiff, without defining the duty
as that of reasonable care. Many courts have expressed a
preference for the Restatement formula as opposed to that adopted
in California. Other courts, however, for various reasons,
have rejected the "unreasonably dangerous" standard in favor of a
different test. Substitutions for the "unreasonably dangerous"
test include the imposition of liability in Washington if the
product
IS "not reasonably safe"
18
is "dangerously defective." Still another
or, in Oregon, if the product
V iew i s that
term "defective" is synonymous with "unreasonably dangerous
1
.he
20
Many states, of course, continue to adhere to Section 402A.
Others recognize Section 402A but adapt it to reflect principles
established in the state law. Wisconsin, for example, purports
to recognize Section 402A but holds that the Section 402A
standard is the equivalent of negligence per se . New York has
established a negligence-based cause of action entitled "strict
products liability," which states the ingredients for liability
II-7
22
and the applicable defenses in one three-pronged formula. The
formula provides that the manufacturer of a defective product
which causes injury is liable if (1) the product was being used
for its intended pur pose-- thi s also includes foreseeable
23
misuses; (2) the user would not, by the exercise of reasonable
care, have discovered the defect and perceived its danger; and
(3) the person injured could not, by the exercise of reasonable
care, have averted the injury. A majority of the judges on the
New York Court of Appeals have recently reaffirmed their
preference for the New York rule, which recognizes the defense of
contributory negligence in a strict liability action, as opposed
to the standard enunciated in Section 402A.
This wide disparity surrounding both the definition of defect
and the most desirable form of strict liability has led to
substantial confusion and unequal treatment of products cases in
state courts.
Strict Liability in Design Cases
The process of applying strict liability in design defect
cases is somewhat different from that in manufacturing defect
cases. Inasmuch as strict liability was initiated to alleviate
problems of the plaintiff's burden of proof, it is clear that the
theory works reasonably well in manufacturing defect cases where
the defect was in the construction of the product. In design
defect cases, on the other hand, the alleged defective design is
the result of a conscious choice of the manufacturer to design
its product in a certain manner. Thus, although strict liability
shifts the focus from the conduct of the manufacturer to the
performance of the product, the way in which the product was
designed resulted from a conscious human choice. Consequently,
some courts have pointed out that the results in design cases
seldom differ, whether the cause of action is one of negligence
or of strict liability.
Dean Wade has pointed out that the difference between
negligence and strict liability in design defect cases should be
that the element of scienter--knowledge of the risks created by a
product--is imputed to the manufacturer when strict liability is
applied. Yet, even when the negligence standard of reasonable
care is imposed, the manufacturer is still obligated to assume
II-8
the position of an expert in the field and to keep abreast of the
most recent scientific developments in the industry. Under
this standard, the negligence test of whether the manufacturer
knew or should have known of the dangers is only slightly less
demanding than the strict liability technique of imputation of
knowledge of the dangers. As Dean Keeton has observed, "strict
liability as to design defects is virtually a myth," unless
knowledge of scientifically unknowable risks is imputed to
manufacturers when strict liability is applied. Because most
courts have refused to impute knowledge of unknowable risks to
manufacturers, negligence and strict liability are functional
equivalents in design defect cases in most states.
To determine whether a product is defectively designed, the
risks presented by the product must be weighed against its
utility. A product which presents substantial risks is not
necessarily defective, as it may also have great utility. In
balancing the risks and utility of the product, one of the most
comprehensive lists of factors to be considered has been proposed
by Dean Wade, and has been adopted by courts in Oregon and
Arizona as well as the Federal District Court for the Eastern
District of Pennsylvania
considered are:
Under this test, the factors to be
(1) The usefulness and desirability of the product--its
utility to the user and to the public as a whole.
(2) The safety aspects of the product--the likelihood that
it will cause injury, and the probable seriousness of
the injury.
(3) The availability of a substitute product which would
meet the same need and not be as unsafe.
(4) The manufacturer's ability to eliminate the unsafe
character of the product without impairing its
usefulness or making it too expensive to maintain its
ut il ity .
(5) The user's ability to avoid danger by the exercise of
care in the use of the product.
II-9
(6) The user's anticipated awareness of the dangers inherent
in the product and their avoidabil ity , because of
general public knowledge of the obvious condition of the
product, or of the existence of suitable warnings or
instr uc tions .
(7) The feasibility,
on the part of the manufacturer, of
the product
spreading the loss by setting the price of
or carrying liability insurance.
The User's Conception of the Product
One of the most important factors that some courts have
considered in the test of defectiveness in design cases is the
sixth factor enumerated by Dean Wade--the user's anticipated
awareness of the dangers in the product. The Restatement
definition of "unreasonably dangerous" is that "the article sold
must be dangerous to an extent beyond that which would be
contemplated by the ordinary consumer. . . ." Following the
Restatement , a number of courts have adopted, as the sole test of
defectiveness, the test of whether the product was dangerous to
an extent beyond that contemplated by the ordinary consumer.
Other courts, however, have advocated its use only in conjunction
with the other balancing factors.
Related to the consumer's expectations of the product is the
open and obvious nature of the danger. It had long been the
majority rule that the open and obvious nature of the dangerous
condition barred recovery because the manufacturer of the product
had no duty to guard against, or to warn of the dangers of, an
obviously dangerous condition. Although many courts continue to
adhere to this view.
the "open and obvious" bar has become
subject to increasing criticism over the years, and an increasing
number of courts have repudiated its rigidity. There may be a
limited number of situations where a manufacturer can easily
correct or warn about an obvious danger without in any way
impairing the utility of the product; the obvious risk may not be
an inherent one. The New York Court of Appeals has, in fact,
recently overruled the case of Campo v. Scof ield , which had
been the leading case in support of the "open and obvious" rule.
Thus, the majority view is now that the open and obvious nature
11-10
of the danger is only one factor to be considered in conducting
the balancing test of defectiveness.
The open and obvious danger, however, should be contrasted
with the commonly known danger. In the latter situation, the
danger of the product may be such common knowledge that the
product cannot be considered to be defective. "Although a knife
qualifies as an obviously dangerous instrumentality," for
example, "a manufacturer need not guard against the danger that
it presents." This type of hazard is an inherent risk of the
product; it is also one that all reasonable persons would be
aware of in the course of using the product.
The Manufacturer's Ability to Make the Product Safer
Another of the most important considerations in Dean Wade's
formulation of the test for defectiveness is the fourth--the
manufacturer's ability, within practical and technological
limits, to improve the safety of the product. The availability
of possible alternative designs and matters relating to industry
custom relate to the "state-of-the-art" issue. While the custom
of the industry is important in determining whether the product
is unreasonably dangerous, the position that conformance with
industry custom is not an absolute defense is a virtually
unanimous view, as many courts have realized that an entire
industry may have been at fault in not improving its
techniques. Illinois is the one state which holds that
evidence of industry custom is immaterial in a strict liability
suit, and that the matter of whether a safer design was
feasible at the time that the product was marketed is also
immaterial for strict liability purposes.
The "state of the art" problem is particularly troublesome in
regard to product-related injuries which are incurred through the
use of older products. Manufacturers have complained that
liability has been imposed in such cases, even where the product
has been used for prolonged periods, passed through several
owners' hands and modified in varying degrees, including removal
of some safety features. Nevertheless, our legal contractor's
examination of the case law reflects that most courts refused to
impose liability where the evidence indicated that the accident
in question was caused by normal wear and tear of the product.
II-1 1
In order to reach the jury, the plaintiff must introduce
sufficient evidence to justify the drawing of an inference that
the defect existed when the product left the hands of the
manufacturer. Where the evidence merely illustrates that an
accident happened after years of prolonged use, and possible
misuse, of the product, and there is no evidence from which to
conclude that the product was defective at the time of sale,
judgment will usually be entered for the manufacturer.
Nevertheless, there often is a conflict in the evidence and the
matter is left to the jury to decide. See VII-3^.
Conclusion
While the balancing approach is a conceptually sound
technique to apply in deciding design issues, it is by no means
an easy test, whether the factors involved are weighed by the
judge or by the jury. Due to the complexities involved in the
process, a return to negligence law has been advocated as one
means of minimizing the uncertainty in design cases. Professor
Henderson contends that design cases are "polycentr ic" to the
extent that they should not be judicially resolved at all.
Professor Twerski and his colleagues disagree. With such
diversity of opinion, a uniform approach to design cases does not
seem close at hand. Nevertheless, the distinction between
"strict liability" and "negligence" in product liability is often
more one of language, than actual results. The time may have
arrived to make the law clear as to what is required in regard to
the manufacturer's duty to design. At p. VII-13, some suggestions
are made as to how this might be accomplished.
The Manufacturer's Duty To Warn Users or Consumers
About Hazards Connected With Its Product
Introduction
A manufacturer has a duty to warn purchasers and users of its
product of the dangers associated with the use of that product.
Liability for failure to give such warning may be predicated on
negligence. strict liability in tort, and even breach of
warranty. The doctrine has wide applicability and it has
recently been observed that "almost every product liability case
has a potential issue of failure to warn."
11-12
The frequency with which plaintiffs use failure to warn as a
basis for asserting that manufacturers should be held liable for
injuries which result from the use of their products stems from
two major factors. The most important is that courts commonly
require no additional showing, either of fault on the part of the
manufacturer or of a defect in the product, in order to allow a
plaintiff to recover for injuries which occurred because of the
absence of a proper warning. As a result, plaintiffs in
product litigation often rely on an alleged failure to warn in
order to avoid the proof problems involved in demonstrating the
5 ^
existence of manufacturing or design defects.
Even in situations where other kinds of defects are alleged,
plaintiffs frequently rely on manufacturers' failures to warn as
an alternative ground for claiming damages. There is a
particular logical nexus, for example, between a manufacturer's
duty to design a product which is safe for ordinary use and its
duty to warn of the dangers of a product which has not been--or
even cannot be — designed to be completely safe. Where, however,
the manufacturer does in fact provide an adequate warning, it
will sometimes insulate him from liability for harm caused by
what would otherwise be a design defect. Where the testing,
processes of the manufacturer are inadequate, on the other hand,
courts have usually imposed liability on the failure to warn \
rather than on the failure to test the product adequately. "*■
Theories of Recovery
Despite the extensive litigation surrounding the duty to
warn, there is nevertheless much confusion as to the doctrinal
underpinnings of the duty. Primarily, there is strong
disagreement as to whether the three possible legal theories of
recovery provide distinct tests for determining the existence or
discharge of the duty. In the early decisions following the
promulgation of Section M02A of the Restatement (Second ) of
Torts , the courts usually concluded that the three theories
provided identical standards for determining whether the duty to
warn existed, and whether it was discharged in a particular case.
In some of these cases, courts have explicitly stated their
57
belief in the identity of two or more of the three theories.
Under this view, it is said that the test under any theory is
whether the manufacturer "adequately warned of known or
11-13
reasonably foreseeable" dangers involved in the use of his
product. In other cases courts have used the negligence
standards of the Restatement (Second ) of Torts Section 388 and
the strict liability standards of Section 402A interchangeably in
duty to warn contexts and thus implicitly have not recognized any
major difference in the standards. In one case, for example, it
was held that Sections 388 and 402A were "consistent," the strict
liability test being that a product is "unreasonably dangerous"
if the manufacturer failed to give a warning "reasonable under
the circumstances." Another court used the "unreasonably
dangerous" standard of Section 402A to determine a manufacturer's
liability for negligence.
In contrast to these holdings that the three theories of
liability are identical in duty to warn cases is a growing trend
of decisions in which courts have held that the theories provide
distinct criteria for analyzing the duty. These cases hold that
the distinction between strict liability and negligence is that
strict liability focuses on the condition of the product which is
sold without a warning, while negligence relates to the
reasonableness of the manufacturer's actions in selling the
product without a warning. However, these courts do inject
some elements of negligence into the strict liability test. The
strict liability test in determining whether a product is
unreasonably dangerous is to:
assume the seller knew of the product's propensity to
injure as it did, and then to ask whether, with such
knowledge, he would have been negligent in selling it
without a warning.
The confusion between the two approaches may be attributed to
two concrete causes. Part of the problem stems from the language
of two comments to Section 402A. Comment j requires that, for a
manufacturer to avoid strict liability for the allergic reactions
which some users may have to its product, it must warn of the
possibility of the reaction if it "has knowledge, or by the
application of reasonable human skill and foresight should have
knowledge" of the presence of the allergenic ingredient and the
danger. Comment h requires the seller to warn of dangers which
may result from a particular use of its product, where it "has
reason to anticipate that danger may result" from the particular
11-14
6M
use. Both comments place the emphasis on the seller's
knowledge of the dangers that exist, rather than on the dangerous
properties of the product itself.
Nevertheless, it is clear that the major source of the
confusion is a conceptual one. The tests as to whether a product
is unreasonably dangerous without an adequate warning or whether
a manufacturer is negligent in failing to provide a warning both
involve a consideration of the danger the product presented to
the unwarned public at the time the product was placed on the
market. Since under negligence principles, the manufacturer is
held to the standard of an expert in the field, there is no
significant difference between negligence and strict liability
unless manufacturers are held liable for failing to warn of risks
which were unknowable or unforeseeable when the product was
marketed. In decisions studied by our legal contractor, courts
held the manufacturer responsible only for risks known at the
time of marketing. Consequently, under the present state of the
law in most states, negligence and strict liability in warning
cases appear to be functional equivalents.
Factual Consid.gr.atar0-n s
Even though the legal theories upon which particular cases
have been brought may differ, and even though these theories may
be theoretically quite distinct, courts appear to utilize a
uniform list of factors in their analysis of failure to warn
problems, regardless of the ground upon which these problems are
raised. While some of these factors are common to other types of
product liability cases--espec ially design cases--other s are
unique to failure to warn situations.
Most courts agree that the seriousness of the harm which may
result from the use of the product is the overriding concern in
determining whether a duty to warn exists. Thus, the dangers
66
which are involved in the use of drugs, dynamite
paraphernalia, and certain products used in close connection
with children, such as vaporizers, will usually require that a
warning be given. In contrast, where the degree of potential
harm is not so great, such as the injury which befalls the
hypersensitive user of hair products, a warning will be
required less often. However, courts generally require that the
11-15
serious nature of the potential harm be foreseeable before they
will insist on a warning. Usually, this is considered a matter
for the jury to decide. This creates almost total uncertainty
for a manufacturer. Our legal contractor found only one major
decision where a court has held that an injury which results from
an unintended use is unforeseeable as a matter of law.
The probability of the harm which may result from the use of
the product is another factor considered by courts in determining
whether an adequate warning has been given. Generally, if the
probability of harm is small, the duty to warn will be held to
exist only with respect to the most serious harms. The concept
of "probability of harm" may have a different meaning, however,
depending on the factual situation to which it is being applied.
On the one hand, courts use the concept to describe the
probability that a user will suffer injury in the absence of the
warning. This application includes cases where the warning
concerns the allergenic properties of the product, as well as
those where dangers result from imiproper use of the product.
Clearly in these cases, the provision of the warning will be
instrumental in reducing the probability of injury in the use of
the product.
On the other hand, courts also consider the probability of
injury in the use of the product, irrespective of whether the
warning is given. Cases in which this probability has been
considered include those involving the polio vaccine, as well
as those which deal with warnings as to idiosyncratic allergic
reactions from the product, where the user has no way of
determining his hypersensitivity prior to exposure to the
product. The probability of harm is significant in this group
of cases, not because the warning will reduce the number of
injuries, but because it is felt that users of the product should
have the opportunity to weigh for themselves the risks inherent
in the use of the product against the benefits to be obtained
from the product.
A corollary to the probability of harm factor is the user's
knowledge of the harm which may result from the use of a product.
Some courts hold that there is no duty to warn of dangers which
are obvious. Almost all courts agree, on the other hand, that
there is no duty to warn where the danger is generally known.
11-16
Under comment j to Section 402A, strict liability will not be
imposed where the danger or potential for danger is "generally
known and recognized."
The situation sometimes arises where the general danger of a
product is obvious or generally known but the specific danger is
not so apparent. In this type of case courts seem to use two
approaches. Some courts merely state that the "obviousness" of a
danger refers to the specific risk which resulted in the injury
which occurred .
Other courts use a foreseeabil ity standard, holding that if
it is foreseeable that a person would not appreciate the risk
involved in a product's use, then its danger was not an obvious
one. Under either standard, the issue gf the obviousness of
the danger is generally sent to the jury.
Foreseeab il i ty of misuse is a very elastic concept and courts
may use a bit of "hindsight" in some cases. Thus, one court has
held that it was foreseeable that a person would pour alcohol-
based perfume onto a candle in order to scent it, and therefore
held the manufacturer liable for failing to warn of the perfume's
flammability . Nevertheless, the manufacturer could show that
nothing similar had occurred in over twenty-five years the
product had been on the market. Other courts take a more
restrictive view of foreseeab il ity , and might have held for the
manufacturer in that case.
-^iC
Another recurring issue in duty to warn cases is the matter
of to whom the warning must be given. Under the Restatement , a
manufacturer will be liable to users of his product, even though
they obtained the product through third parties. This rule is
applicable under either a negligence or a strict liability
theory of recovery. The question often arises whether a warning
to the third party of the product's dangers is sufficient to
discharge the manufacturer's duty to the user. To answer this
question, it becomes essential to identify the "position of the
supplier in the distributive structure."
Generally, where a manufacturer sells its product in bulk to
a distributor, who then packages the article for retail sales,
the manufacturer will discharge its duty with a warning to the
11-17
distributor. The distributor will then be reasonably expected to
pass the warning on to the ultimate purchaser or user. So also
will the duty be discharged by a warning to a purchaser who is a
professional under whom the ultimate user will work.
Similarly, it is well settled that the duty to warn users of
prescription drugs is normally fulfilled by the manufacturer's
communication to the prescribing physician by way of package
inserts, letters, and occasionally detail men. However, the
rule is not absolute, and where, for example, the widespread
distribution of a defendant's oral polio vaccine was through mass
clinics, it was held that the warning must be given in
advertising which would reach the potential users directly.
While most of the factors that courts consider in evaluating
the scope and discharge of the duty to warn are grounded in the
nature of the product itself, courts sometimes also look to other
statements made by sellers about their product. Courts will
frequently find, for example, that there is a higher standard by
which to judge the duty to warn where the manufacturer has made
representations of the safety of its product. Section 402B of
the Restatement (Second ) of Torts holds the manufacturer strictly
liable for the misrepresentation where the consumer has
justifiably relied on it, even though the manufacturer was not
negligent. Thus, it has been held that, even though a
plaintiff's idiosyncratic addiction to defendant's drug could not
possibly have been foreseen, the manufacturer, by representing
the drug as nopadd ic tive , could nevertheless be held liable under
Section 402B.
Conclusion
Despite the growing reliance on the failure to warn as a
basis for imposing liability on manufacturers for injuries which
result from the use of their products, confusion still reigns as
to the theoretical basis of this liability. While courts attempt
to distinguish liability based on negligence from strict
liability in the failure to warn area, the factors at play under
either theory remain the same. Thus, the more serious the harm,
the greater the probability of the harm and the less obvious the
danger, the greater the likelihood that courts will require the
manufacturer to warn of the hazards involved in the use of his
product .
11-18
But there can be little doubt that strict liability has given
courts latitude to shift the balance among these factors and
occasionally allow juries to reach decisions that can be
justified only by the application of hindsight. Remedial
proposals that address this problem are discussed in Chapter VII
of this report.
How Does the Conduct of the Product User or Consumer
Affect His Claim?
Introduction
Product liability actions which are based on negligence have
traditionally been subject to the defenses of assumption of risk
and contributory negligence. These types of conduct are
generally treated as affirmative defenses, and the burden of
establishing them rests with the defendant. The distinction
between the two is that assumption of risk concerns knowledge of
the danger and acquiescence in it, while contributory negligence
involves a departure from the standard of conduct of a reasonable
person .
As has been indicated in the previous section, it has been
held that a manufacturer may be relieved of liability for injury
caused by a dangerous product if the danger it presented was
patent or ^obvious, or should have been obvious, to the
98
plaintiff. The rationale for the patent danger rule is that a
manufacturer is under no duty to guard against injury from a
source which is manifestly dangerous. Because a determination of
the question of duty is usually a matter for the court, rather
than the jury, a finding that the defect was an obvious one will
usually result in a directed verdict for the defendant. Not all
jurisdictions recognize the patent danger rule, and a trend
toward its abolition may be indicated by its abandonment in New
York, a jurisdiction which was formerly a leading exponent of the
r ule .
Another situation in which the defendant in a negligence-
based product action may be excused is where the plaintiff has
used the product in a manner which was unintended by the
manufacturer. This type of conduct is usually characterized as
misuse or abnormal use.
11-19
With the widespread acceptance of strict liability as a
theory of recovery for injuries caused by defective products,
interest has focused on how a plaintiff's conduct will affect an
action brought under that theory. Section 402A of the
Restatement (Second ) of Torts , which many courts accept as the
basis for strict liability, considers defenses based on the
plaintiff's conduct in Comment n. The Restatement position is
that assumption of risk on the part of the plaintiff is a good
defense in a strict liability action. However, conventional
contributory negligence, in the sense of a failure to discover
the danger presented by a product, or a failure to avoid injury
by the product, is not considered a defense.
In addition, the defense of misuse of the product is
recognized in Comment h to Section 402A. Misuse of a product
defeats the plaintiff's contention that a product was defective,
or that the alleged defect caused the plaintiff's injury. Since
these are elements of the plaintiff's case, misuse is not usually
regarded as an affirmative defense. The existence of misuse
merely rebuts an essential element of the plaintiff's case.
The patent danger rule has also been applied to strict
liability actions. In some instances, it has been applied
where the plaintiff's conduct amounts to nothing more than a
negligent failure to discover a defective condition.
A recent development with which courts have been faced is
whether the concept of comparative fault should be applied in
considering the plaintiff's conduct in strict liability actions.
Assumption of Risk
The elements of the defense of assumption of risk, as stated
in Comment n, are knowledge of the danger or defect, and a
102
voluntary and unreasonable encounter of it. The plaintiff
must have actual knowledge of the particular risk
assumption
m
1
der for
Stated
of risk to constitute a valid defense.
otherwise, assumption of risk requires a subjective realization
by the plaintiff of the danger presented by a product. A
plaintiff may not be barred from recovery merely because
circumstances should have put him on notice that the product was
11-20
dangerous. Nevertheless, actual knowledge may be inferred fro
the circumstances of the case.
m
There is currently a split of authority between jurisdictions
as to exactly what knowledge or type of knowledge on the part of
a plaintiff is required to establish assumption of risk. Some
courts seem to require that a plaintiff must be aware of the
specific defect which threatens him with danger. Thus, in a
recent Pennsylvania case involving a helicopter crash due to an
alleged defect in design, it was said that a plaintiff "is
precluded from recovery only if he knows of the specific defect
eventually causing his injury and voluntarily proceeds to use the
product with knowledge of the danger caused by the defect."
In apparent opposition to the decisions which hold that
knowledge of the specific defect is necessary for assumption of
risk are those which deem the knowledge requirement satisfied by
a generalized knowledge of the danger encountered without
reference to the specific defect. For example, where the
plaintiff's decedent was working under the bed of a dump truck, a
knowledge of the danger of his position, but not of the alleged
design defect which caused the bed to fall, was held to be
sufficient to satisfy the knowledge requirement.
Courts will consider factors such as age, experience, and
surrounding circumstances in evaluating a plaintiff's knowledge
of a defect. Thus, a carpenter who was struck in the eye by a
nail which shattered when he hammered was found not to have
assumed the risk even though he continued to use the nails after
the heads of several of them had broken off. In affirming a jury
verdict for the plaintiff, the court noted that he was only 19
years old and had only been working for a short period of
time .
The obviousness of danger in the product may be a highly
relevant factor in determining whether a plaintiff has sufficient
knowledge to assume the risk. However, cases dealing with
obvious dangers in connection with assumption of the risk should
be distinguished from those decisions in which the patent danger
rule is applied in finding no design defect. Pennsylvania, for
example, does not recognize the patent danger rule, but a
Pennsylvania decision has held a manufacturer not liable, as a
11-21
matter of law, where the plaintiff was injured while reaching
into a glass-breaking machine to prevent it from jamming. The
court emphasized the deliberate and voluntary nature of the
plaintiff's action.
Warnings or specific directions concerning the avoidance of
the danger posed by a product are also relevant in determining
whether the plaintiff had the requisite knowledge for assumption
of risk. For instance, where a plaintiff had been provided with
the manufacturer's instructions as to the proper tire size and
air pressure for his vehicle, his action in disregarding those
instructions was the basis for barring his recovery under the
doctrine of assumption of risk.
The second element of the assumption of risk defense in
strict liability actions is the voluntariness of the plaintiff's
action in encountering the danger presented by the defective
product. In evaluating the voluntariness of the plaintiff's
encounter of the risk, some decisions take into consideration the
fact that the plaintiff was required to make a split-second
decision. For example, where the plaintiff's defective brakes
had failed and he was required to decide whether to turn into a
gas station wall or to continue along the highway, his decision
to turn into the gas station wall was held, as a matter of law,
not to be assumption of risk because the decision was not
1 1 T
"voluntary." Similarly, the Supreme Court of Texas has
observed that "a negligent failure to choose the best escape from
the throes of peril is not a voluntary encounter with the
danger." It has also been recognized that in an employment
situation, the economic pressure on an employee assigned to a
dangerous machine may negate the element of voluntariness.
Comment n to Section 402A introduces the element of
reasonableness to the defense of assumption of risk as it applies
to strict liability actions. In the conventional application of
the defense, its submission to the jury is on a subjective basis,
since it requires the jury to find that a plaintiff knowingly and
willfully assumed the risk. The plaintiff's claim is only barred
if he was unreasonable in assuming the risk.
Although many jurisdictions have expressly adopted Comment n,
only a handful of decisions have explored the impact of applying
11-22
reasonableness in evaluating assumption of risk. In discussing
the proper approach to the issue, the Supreme Court of Oregon has
r ecen tl y stated :
It should be emphasized that this element of
unreasonableness pertains only to the nature of
plaintiff's decision to encounter the known danger. We
are not concerned with the apparent reasonableness or
unreasonableness of the physical conduct through which
plaintiff encountered the danger, but rather the
reasonableness of his decision to do so. This
distinction, while seemingly theoretical, is
signi f leant .
on
the other hand, has specifically rejected
Comment n to Section 402A insofar as it advocates the concept ,of
One Texas court,
m t n to Secti
reasonableness as a criterion in judging assumption of risk
Misuse
That conduct on the part of the plaintiff which the courts
categorize as "misuse" differs significantly from assumption of
risk. Comment h to Section 402A recognizes that an abnormal use
or misuse of a product may defeat a claim that an injury was
caused by the defective or unreasonably dangerous condition of
the product. Causality, of course, is a necessary element of the
plaintiff's case. For example, a plaintiff who suffered a fall
from an allegedly defective ladder is required to show that the
ladder was being used in a normal fashion in order to recover.
In another case, the manufacturer prevailed on the causation
issue where a metal pin inserted in the plaintiff's leg broke
when the plaintiff tried to walk on it against the specific
instructions of his doctor.
Misuse by the plaintiff may indicate the absence of a defect,
as wel 1 _as lack of causationl^i In a case where the plaintiff
disregarded a warning not to use a grinding wheel above certain
speeds, for example, his action for damages was defeated because
he failed to prove that the wheel was defective. Alteration
of a product may also constitute misuse. When the plaintiff
nailed wooden strips to the bottom of a ladder, the ladder was
found not defective and recovery was barred.
11-23
In the situation where the plaintiff's misuse and the
defective condition of a product combine to cause the injury, the
plaintiff will be allowed to recover. In a Texas case where the
jury found that the plaintiff was negligent in his use of the
product and also that the product was defectively designed, it
was held that recovery would be barred only if the plaintiff's
misuse had been the sole cause of his injuries
12
V
The test for establishing whether a plaintiff's conduct in
relation to a product should bar his recovery is whether the
plaintiff's manner of use was foreseeable. Foreseeabil ity seems
firmly accepted as the preferred standard for evaluating the
legal consequences of a plaintiff's conduct because of the broad
protection which it affords plaintiffs in comparison with other
standards. Occasional decisions, however, apply a narrower,
intended use test. The major distinction between foreseeabil ity
and intended use is the difference between an objective and
subjective standard in evaluating the use of a product. In the
automobile-crashworthiness cases where a defective or dangerous
condition results in enhanced injuries, although it was not the
cause of the accident, the application of an intended use
standard will result in a dismissal of the plaintiff's case:
accidents are not the intended use of an automobile. On the
other hand, accidents are an easily foreseeable occurrence, and
application of a foreseeabil ity standard will allow recovery for
injuries enhanced by a dangerous design.
A number of factors are r
particular use of a product is fo
the gravity of the potential harm
and guarding against a dangerou
frequency or unusual nature o
considered relevant as to whether
be barred. Some decisions appear
manufacturers. For example, one
order to constitute a bar, the a
as to eliminate any need of the d
Other courts will look to the ac
only impose liability if it was 1
elevant in determining whether a
reseeable. Some courts compare
with the expense of discovering
s use of a product. The
f a particular use may also be
a plaintiff's recovery should
to place a very great burden on
court has indicated that in
lleged misuse must be so unusual
efendant to anticipate it.
tual frequency of the misuse and
ikely to occur .
Finally, it should be noted that there is confusion in the
case law as to whether a plaintiff's foreseeable, but careless.
11-24
use of a product will bar recovery. For example, in some
situations a manufacturer might be able to foresee that a product
user will remove a safety device on a machine or fail to heed a
warning. This is one more area where it is extremely difficult
for a manufacturer to predict his basic responsibility for
injuries caused by his products.
Contributory Negligence
Unlike misuse, there is no question but that contributory
negligence is an affirmative defense. Comment n to Section M02A,
however, does not recognize the applicability of contributory
negligence in its conventional form in strict liability actions.
Thus, the negligent failure to discover a defective condition or
failure to use reasonable care to avert injury after such
discovery will not bar recovery. However, to the extent that a
plaintiff proceeds negligently in the face of a known danger, his
conduct will be covered by the defense of assumption of risk.
Only three jurisdictions expressly reject the Restatement
view that failure to discover a defect or avoid injury may
constitute contributgrv negligence. The New York Court of Appeals
in Codl ing v. Paglia held that plaintiffs in strict liability
actions were required to have exercised that degree of care for
their own safety that a reasonably prudent person would have
exercised under the same circumstances. Nevertheless,
contributory negligence which plays a minor role in causing an
accident will not bar recovery. The plaintiff's negligence must
be a substantial factor in bringing about his injury.
In a later decision, New York abolished the patent danger
rule, which formerly would have defeated the plaintiff's
action. However, it was noted that the obviousness or
openness of the danger is available as a defense to the defendant
on the issue of whether the plaintiff had exercised the
reasonable care required to protect himself under the
circumstances.
132 133
New Hampshire and Wisconsin have also recognized the
applicability of conventional contributory negligence to strict
liability actions. In both jurisdictions, this result has been
tempered by the application of comparative fault principles.
11-25
Comparative Fault
The application of comparative fault principles to actions in
strict liability is regarded as having great potential for
relieving some of the inequities incurred by both plaintiffs and
defendants as a result of the "all or nothing" approach to
recovery presently in use. A number of jurisdictions now have
decisions in which the relationship between comparative fault and
strict product liability is considered.
Wisconsin is the jurisdiction with the most experience in
this area. Its initial decision to adopt strict liability
indicated that no distinction would be made between contributory
negligence in its conventional form, and assumption of risk, in
the application of Wisconsin's comparative negligence statute.
The Wisconsin court also indicated that misuse of a product might
relieve or limit liability. The rationale of the Wisconsin
approach of applying comparative fault in strict liability cases
was that the latter merely amounted to negligence per se , to
which the plaintiff's fault could be compared. Thus, the court
reasoned that the defective nature of a product could, as a
causal factor of an injury, be compared with the causal
contributory negligence of the plaintiff. Other courts, in
applying comparative fault principles to strict liability
actions, have simply concluded that such actions are imbedded in
the concept of fault.
In contrast to the Wisconsin approach to comparative fault, a
more limited approach has been adopted in Florida, where
apportionment of fault in strict liability actions is restricted
to assumption of risk, and the failure to exercise due care for
one's safety after the discovery of the product's dangerous
condition. Oklahoma has said that applying a comparative
negligence statute to the defense of assumption of risk in a
products case is forbidden because of specific statutory language
limiting apportionment to situations where the plaintiff's
conduct was formerly classified as contributory negligence.
A recent V/isconsin decision has indicated that foreseeable
misuse of a product by a plaintiff would limit his recovery under
the comparative fault approach, while unforeseeable misuse would
bar recovery completely.
Different reasoning has been adopted
11-26
139
by a Federal District Court sitting in Idaho. The court
concluded that the rationale of Idaho's comparative negligence
statute required a comparison of all legal causes of the
plaintiff's injuries. This led the court to reject the argument
that unforeseeable misuse would constitute an absolute defense.
Accordingly, both foreseeable and unforeseeable misuse are taken
into account in the apportionment of damages.
A growing number of jurisdictions have expressed approval of
the concept of applying comparative fault concepts to strict
liability actions, even though strict liability applies where
all possible care was exercised in the preparation of the
product. Legal commentators have also pointed out the advantages
to be derived from apportioning damages on the basis of fault in
iS
Only one jurisdiction has departed
strict 1 iabil ity cases
from this trend. Thus, it seems safe to say that, although it
entails certain conceptual problems, the approach of applying
comparative fault principles to strict liability actions will be
increasingly utilized in order to overcome the inequities
currently involved in application of the "all or nothing"
approach. This trend may be accelerated by the National
Conference of Commissioners on Uniform State Laws' recent
approval of a model Comparative Fault statute. The law
encompasses both negligence and strict liability actions.
Nevertheless, it would seem that for the foreseeable future
uncertainty and variety of results will be part of state tort law
on the subject of plaintiffs' conduct in product liability
actions. Chapter VII discusses and evaluates remedial proposals
that could improve this situation.
A Product Liability Defendant's Right to Shift
the Cost of Accidents Onto Others.
Introduction
There are two basic ways a defendant can shift the cost of an
accident on to a party other than the plaintiff: by an action in
indemnity or a claim for contribution. Indemnity is usually the
recovery of the full amount of one's liability from a third
party. Usually, awards of indemnity are based on one of three
basic theories:
11-27
One involves the concept of different qualities of
negligence; another involves a breach of duty as between
tortfeasors; the third gives indemnity to the tortfeasor
who is vicariously liable by operation of law.
The courts of Illinois and the Tenth Circuit Court of Appeals,
145
in interpreting Kansas law, have decided that a manufacturer
who is held strictly liable in a products case cannot recover
indemnity from a purchaser. Other state courts allow such
claims .
Contribution is the recovery of part of the loss from a third
party. The loss is divided (or apportioned on the basis of
fault) among those responsible. The essence of contribution is
the existence of joint liability:
[E]ven though there may have been no concert of action
between the appellees, the cumulative effect of their
several acts was a single, indivisible injury, which
probably would not have resulted but for the concurrence
of such acts.
Traditionally, contribution among joint tortfeasors was not
allowed, because it was believed that the courts should not aid
wrongdoers. This rule has been changed by judicial mandate in
nine states, and by statute in at least 17 others. To
recover contribution, a manufacturer must show that another party
was at fault. This is a distinctly different theory from that of
indemnity, where the manufacturer must show that the other
party's fault was both greater and also of a different quality.
It may also conflict with the policy of spreading the loss which
underlies strict liability. Accordingly, there has been some
difficulty in integrating old doctrines with strict liability
principles. One court has flatly stated that there is no right
of contribution between one who is held strictly liable and one
who is held liable on a traditional negligence theory. Other
courts allow such claims.
For purposes of contribution and indemnity, third parties may
be classed as (1) ultimate purchasers, (2) intermediaries, such
as retailers or wholesalers, and (3) co-manufacturers, such as
assemblers or component part manufacturers.
11-28
Suits Against Ultimate Purchasers
Indemnity is rarely obtained from ultimate purchasers.
Courts sometimes conclude that the manufacturer has not stated a
claim for indemnity, but only a defense to the original
lawsuit. Although indemnity issues regarding the quality of
the conduct traditionally focus on active and passive negligence,
some courts have considered the issue in terms of a duty owed by
the user to the manufacturer. Where the user or owner is an
ordinary person with no special knowledge, courts have found that
there is no duty owed the manufacturer and, therefore, no basis
for indemnity. Where the user is engaged in a trade requiring
special knowledge, however, the courts are more likely to find
that he owes some duty to the manufacturer.
Common liability is a prerequisite for recovering
contribution. A manufacturer cannot recover contribution,
therefore, from one who could not be liable to the original
plaintiff. Thus, those who are immune from a suit by the
original plain ti ff--such as spouses and employer s--are also
1 5^
protected from suits for contribution. Spouses are usually
protected when the doctrine of interspousal immunity exists in
the jurisdiction. Far more important in product liability
law, however, is the immunity of employers, based on Worker
Compensation laws. Employers are thus a special class of
ultimate purchasers.
Worker Compensation laws have been interpreted as absolutely
r
1
barring recovery of contribution from employers under the laws of
at least five states.
Several courts have recognized the
15'
resultant burden on manuf ac tur er s^ ^but have stated that the
solution must be a legislative one. The consequences are that
manufacturers must bear losses caused, in part, by the negligence
of an employer, and that there is less incentive for employers to
take safety precautions or warn employers of the hazards
involved .
Although four states
does not bar a defendant's
have held that interspousal immunity
covery of contribution from the
spouse of the plaintiff,""' Pennsylvania is the only state to
hold that a defendant may recover partial contribution from an
1
employer covered by the Worker Compensation laws.
Thi s rule
11-29
has been applied even where the manufacturer is strictly liable
and the employer negligent. An approach which lies between
that of Pennsylvania and the other jurisdictions is to allow
contribution where the employer physically altered the
product .
The Supreme Court of Minnesota, in sounding a strong response
to the inequities of the employer's nonliability under Worker
Compensation laws, has held that the bar against recovery of
1 62
indemnity is unconstitutional:
[N]o legitimate objective is fostered by an
interpretation of the workmen's compensation laws to
prevent indemnification to a third-party tortfeasor from
a negligent employer. With this in mind, there may be a
due process violation when the third-party tortfeasor's
right to indemnity is extinguished by the workmen's
compensation laws without providing him a reasonable
substitute for his right.
Suits Against Intermediaries
When a manufacturer seeks indemnity from one who is later in
the stream of commerce, but who is not the final purchaser--such
as a distributor or retailer--courts have given policy reasons
for extending product liability to such intermediaries. This is
especially true when the court has already said that a basic goal
of strict liability is to distribute a loss among those best able
to bear it:
Retailers like manufacturers are engaged in the business
of distributing goods to the public. They are an
integral part of the overall producing and marketing
enterprise that should bear the cost of injuries
resulting from defective products. Strict liability on
the manufacturer and retailer alike affords maximum
protection to the injured plaintiff and works no
injustice to the defendants, for they can adjust the
costs of such protection between them in the course of
their continuing business relationship.
11-30
Such an approach, however, argues for an apportionment of the
loss, and not a complete shifting of the loss as occurs with
indemnity .
The unfairness of the "all-or-nothing" application of
indemnity was discussed at length by the California Appellate
Court in
the court
Ford Motor Co , v. Robert J. Poeschel, Inc
There ,
against a
affirmed dismissal of Ford's complaint
dealer, but discussed at length its desire for a fairer approach
Judicially favored objectives of deterrence and accident
prevention would be promoted by imposing some liability
on a dealer who knew of danger and did nothing. To
shift the entire loss to him would not serve these
objectives, for then the manufacturer would escape scot-
free. A wise rule of law--one designed to stimulate
responsibility throughout the merchandising chain--would
require both parties to share the loss.
While rarely discussing such policy matters directly, most courts
are, in fact, reluctant to award a manufacturer indemnity from a
later intermediary, such as a distributor or retailer. As in the
cases concerning ultimate purchasers, courts usually base their
decisions on alleged failures to state a claim, the active and
passive negligence distinction, or the lack of a duty to the
manufacturer. Courts often dismiss claims for indemnity against
intermediaries, for example, when the claims, if proven, would be
a complete defense to the original action.
Courts more^^often award manufacturers contribution from
168
intermediaries. Courts are normally more willing to divide or
apportion the loss between manufacturer and dealer by allowing a
contribution claim than to shift the entire loss to the dealer
under an indemnity theory.
Suits Against Co-Manufacturers
Courts are apparently more willing to allow indemnity claims
against those earlier in the stream of commerce than against
those who are later. Even here, however, the application of
the traditional active and passive rule restricts recovery, when
11-31
placing a defective product in the stream of commerce is treated
as active negligence, precluding recovery.
Courts al so ^ frequen tl y consider the relative knowledge of the
two parties,
exper ience
1
denying indemnity to those with special
characterizing their failure to act as active
negligence. ''~ This same tendency is evident in the opinions
that speak of a duty to inspect, instead of distinguishing
between active and passive negligence. Some courts have awarded
indemnity to manufacturers whose original liability is based on a
failure to inspect a component part. Most courts, however,
have regarded a failure to inspect as active negligence,
especially by manufacturers with special experience and
a manufacturer who fails to inspect a
recover indemnity if inspection was
knowledge. However,
component part may still
impractical or impossible. ' " Superior knowledge of an assembler
may also relieve a component part manufacturer of a duty to warn,
shielding it from a claim for indemnity. To be sure, some
courts speak of "primary and secondary" causes instead of active
and passive negligence or a duty to inspect component parts.
However, the results under the two analyses are much the same.
The advent of strict liability has led the Illinois courts to
abandon entirely notions of active and passive negligence, as
well as primary and secondary liability, in determining indemnity
among co-manufacturers.
Because indemnity actions against co-manufacturers have been
relatively successful, compared to similar actions brought
against other defendants, the number of contribution actions
against co-manufacturers has been fairly small. Typically, when
contribution is sought, it is alleged that the co-manufacturer
supplied a faulty component part to the primary manufacturer.
The New Doctrines of Comparative Fault
New doctrines distribute the loss according to each
defendant's contribution to the injury. These new doctrines have
been instituted directly by statute, indirectly by a court
opinion expanding existing statutes, or by judicial decree.
Uniform Laws . — The 1939 version of the Uniform Contribution
Among Tortfeasors Act included an optional provision allowing
11-32
180
apportionment of damages according to the degree of fault.
The provision was adopted in only four states: Arkansas,
Delaware, Hawaii, and South Dakota. The 1955 version of the
U. C. A. T. reversed on this point and explicitly forbade such
apportionment. There are not enough decisions to determine the
effect of the 1939 Act in the four states which adopted it. As
has been indicated, the National Conference of Commissioners on
Uniform State Laws recently adopted a Uniform Comparative Fault
Act. This act provides that responsibility among parties should
be based on the proportionate fault of each. The Conference has
indicated that the 1955 version of the U . C . A. T . should be
modified to accord with the new Uniform Comparative Fault Act by
any state that adopts the comparative fault principle.
Extend ing Comparative Negligence Statutes . --Some states have
statutes applying comparative negligence to suits between
plaintiffs and defendants. The statutes do not explicitly extend
the doctrine to suits among defendants for indemnity or
contribution. However, the courts of Wisconsin and Maine
have extended comparative negligence to suits among defendants.
In contrast, the First Circuit Court of Appeals, has refused to
186
extend New Hampshire's law in a similar fashion. nJ'^^ Minnesota
courts have not yet expanded that state's statute, although at
least one commentator has urged them to do so.
189
By Judicial Decree . — In Dole v. Dow Chemical Co . , the New
York Court of Appeals adopted a rule apportioning damages,
without relying on a comparative negligence statute:
The conclusion reached is that where a third party is
found to have been responsible for a part, but not all,
of the negligence for which a defendant is cast in
damages, the responsibility for that part is recoverable
by the prime defendant against the third party. To
reach that end there must necessarily be an
apportionment of responsibility in negligence between
those parties.
Shortly ^ ^thereafter , the New York rule was enacted as a
statute .
11-33
In the four years since the rule was adopted, the New York
courts have had time to develop the details of its application.
In contrast to traditional indemnity, the Dole rule allows more
than one defendant in the chain of supply to be found liable for
contribution. While Dole itself involved a negligence action,
the rule was quickly applied in breach of warranty actions
involving product liability, and in actions between one liable
for negligence and another liable for breach of warranty. By
statute, a settlement and release from the original plaintiff
protects a defendant from a later suit for contribution by
another defendant, but the plaintiff's claim against the
remaining defendants is reduced by the amount of the
settlement.
In practice, when the Dole rule is applied, the courts appear
reluctant to require contribution or partial indemnity from
ultimate purchasers, members of the class protected by product
liability law. Thus, the courts have denied manufacturers
contribution from the driver of a car or the dealer who repaired
it, AQ^^'^ from the parents of children who ate paint containing
lead .
Whether the Dole rule will be applied in other jurisdictions
is an open question. The Virgin Islands recently followed the
approach in Dole and applied comparative negligence to the
problem of apportioning the loss among defendants. Florida
and California have also adopted comparative negligence by
judicial decree, but no substantial body of law has developed
concerning contribution among those liable for a defective
product. A California court has very recently held that
comparative negligence does not remove the employer's immunity
from contribution arising out of the Worker Compensation act.
Illinois has adopted a rule apportioning damages for the
aggravation by a negligent doctor of injuries caused by
another. One commentator suggests this case provides a basis
in IllinQis for apportionment of damages in product liability
cases. The Federal District Court in Tennessee has recently
applied a similar approach when ruling that an elevator
manufacturer could not recover full indemnity but was entitled to
a partial recovery from a components manufacturer. The case
did not involve a personal injury, but the standard enunciated
11-34
could readily be applied to a product liability case involvini
personal injury.
On the other hand, at least „Qpe
explicitly rejected the Dole rule.
state, New Jersey, has
The New Jersey case
involved a claim against an employer for contribution and the
court felt it would be, in effect, overruling the policy of the
Worker Compensation act if contribution were allowed.
In sum, the rules regarding apportionment of damages among
defendants vary in important respects and are in a state of flux.
In Chapter VII, Section IV, this report discusses means whereby
uniformity may be brought into the system. The benefits and
shortcomings of a variety of alternative approaches are also
presented .
Product Liability Law in the Workplace--Have
Courts Developed or Have Statutes Required
Different Legal Treatment for Work-Related and
Non-Work-Related Injuries?
Introd uc tion
Anecdotal data reaching the Task Force suggest that workplace
injuries are an important and special part of the product
liability problem.
Preliminary data from the Insurance Services Offices show
that a substantial amount of product liability damages (in terms
of relative size of awards) occur in workplace injuries. For
that reason, it seemed useful to discuss some of the legal rules
that surround that type of injury.
Many products cases involving injuries which are sustained by
employees in the course of employment present issues quite
different from those dealing with non-workplace injuries.
Several factors appear to induce courts to apply different rules
to the treatment of work-related product injuries than to non-
work-related product injuries. These factors may be grouped into
two broad categories: (1) those that are based on the injured
person's status as a worker and (2) those that are based on the
existence of the employer as one who intervenes between the
11-35
injured worker and the manufacturer of the injury-producing
produc t .
Status as an Employee
Persons who are injured at work, of course, are normally
covered by Worker Compensation statutes. Under this system, an
employee injured in the course of employment is provided benefits
without regard to fault. The injured worker is entitled to
benefits for physical injury (including wage loss and medical
expense reimbursement) or death. There is also emerging an
increased concern that the injured worker be rehabilitated,
although practical implementation of such measures has met with
difficulties. Under Worker Compensation systems, a
participating employer is usually — but not al ways--protec ted from
suit by the injured worker. Such protection is not generally
extended to wrongdoers other than the employer, since the
compensation system is not designed to extend immunity to parties
that do not make financial contributions to it.
Of those factors associated with the status of the injured
party as a "worker," the most prevalent is his experience, either
as a long-term user of the specific article which caused injury
or, more generally, as a member of a particular profession or
occupational group. "Experience" has been a determinative, or at
least an influential, factor in cases involving three particular
issues common to product liability litigation: the
manufacturer's duty to wa^rn of hazards associated with the
product, the manufacturer's _djjty to gtiard against nonobvious
dangers, and the establishment of the defense of assumption of
the risk. In respect to each of these issues, it may be asserted
that the injured party's experience had the effect of making a
particular hazard more obvious to him than it would have been to
an inexperienced user of the product, thus resulting in
imposition of different standards in the assessment of the
actions of the manufacturer and the injured party in the
workplace situation. This is particularly common in respect to
the issue of a manufacturer's or supplier's duty to warn of
product hazards. It has been held that there is no duty to
212
warn a worker who is truly experienced. as opposed to an
actually inexperienced injured employee
^13
11-36
Where a dangerous condition is equally within the technical
knowledge of the supplier, the employer and the experienced
employees, the supplier has no obligation to warn of dangers.
Unusually extensive discussion of this issue was provided by the
Iowa Supreme Court in West v. Broderick and Bascom Rope Co.
The i nj ured part y's work experience is also__oftej2_ cited as a
factor in determining whether the warning which was given was, in
Tag^^ "atlequdt^": The courts "often hold that, while therV~Ts"'a~
duty to warn all users (even workers), the adequacy of the
warning may be determined in light of the professional status of
the trained and experienced workers who are expected to use the
product .
The experience of the injured worker has an effect on a cause
of action based on a manufacturer's failure to warn in respect to
the defense of contributory negligence. In two cases where
contributory negligence was allowed as a defense to a claim of
negligent failure to warn, the court focused upon the long
professional experience of each of the plaintiffs as a key factor
in deciding whether each had knowledge of the danger from an
independent source, so as to eliminate failure to warn as a
proximate cause of the harm. In addition, experience and
expertise have been cited as matters requiring different
treatment of work-related injury claims in respect to the
question of the obligation of a manufacturer to provide safety
guards .
Most interesting in respect to the experience factor isa
comparison of two cases in which the injuries involved falls from
scaffolds which did not have safety rails. Upon the same facts,
an experienced professional painter was denied recovery under New
York law against the supplier of the unguarded scaffolding,
while an inexperienced volunteer worker was permitted to proceed
with his claim against the lessor of the scaffolding under Ij
Minnesota law.
Plaintiffs' counsels have argued that the obvious danger
defense ignores a basic maxim of the workplace that even the most
experienced worker may suffer a momentary lapse of concentration
which, when coupled with an absence of safety devices, may result
in severe injury. It has been said that:
11-37
Contributory negligence in a factory setting may often
be just the statistically inevitable consequences of the
performance of repetitive mechanical chores in a
distracting factory environment. Even the most careful
worker will make an occasional mistake which may result
in in j ur y .
Increased recognition of such arguments has led to what the
Seventh Circuit Court of Appeals sees as a trend away from the
rule that there i^^Qo duty to guard against dangers obvious to
experienced workers. In fact, the case most often cited in
support of that rule, Campo v. Scof ield , has_itself been
recently overruled by the New York Court of Appeals
^2^
Another factor which sets an injured worker apart from others
who are harmed by products is that the actions of the worker are
often guided by safety rules established either by statute or
informally promulgated by his employer. The effect which will be
given to a showing that the injured worker was acting in
V iolation of a
j ur isd ic tions .
2;
jgfety
rule when injured varies in different
While a worker might be at a disadvantage, as opposed to
nonworker users, in that he is presumed to have the benefit of
safety instructions to guide his actions, he does enjoy the
advantage of being able to assert usage in the trade to support
his claim that he did not himself act negligently. It has been
held that the fact that an injured worker was following customary
practice and usage, while not necessarily absolving him of
contributory negligence, is relevant to the jury's consideration
of the i ssue .
In terms of the "status" of an injured worker in relation to
the manufacturer, it has been held that a simple negligence claim
may be maintained against a manufacturer by an employee
reasonably expected to be in the vicinity of the probable use of
the product. Moreover, Comment 1 to Section 402A seems to
eliminate any doubts regarding the necessity of a privity
requirement in strict liability suits by injured workers.
However, in Wir th v. Clark Equipment Co . , the Ninth Circuit
Court of Appeals, applying Oregon law, left for jury
determination the question whether an employee who was not
11-38
actually performing his duties at the time he was injured was a
"user" entitled to bring suit under Section 402A or a
"bystander," to whom Oregon had not at that time extended
protection .
More often, however, privity problems in the workplace injury
context involve claims for breach of warranty. Some courts have
permitted injured employees to base their claim on warranty
despite the absence of privity of contract, on the reasoning
that the employee of the purchaser is within the distributive
chain which marks the parameter of a manufacturer's warranty
liability, or that implied warranty protection extends to all
those who are reasonably expected to use the product. However,
some jurisdictions do require a showing of privity to support a
cause of action based on breach of warranty, and refuse to
expand horizontal privity to include employees of a "buyer" for
purposes of providing warrantv protection under Section 2-318 of
the Uniform Commercial Code .
Thus, a person injured by a product may find himself in a
different litigational position when he was an employee--
particularly an experienced one--rather than an ordinary
consumer .
Concept of Involuntary Use of Product
A consideration that is often involved in the discussion of
workplace injuries is the view that an employee is less able to
protect himself from injury caused by a product used in his
employment than is the ordinary user of products. The worker's
method of operation, use of safety devices, and even the very
basic decision to use the machine, tool, or substance which
eventually injures him are matters dictated by his employer. His
actions are always governed, to some degree, by the fact that his
livelihood depends upon his ability to please an employer, who is
naturally interested in productivity and speed. This factor is
often cited by counsel for injured workers in an attempt to avoid
the contributory negligence and assumption of risk defenses.
This matter of "economic compulsion" has been discussed in a
number of decisions, and it appears that many courts have given
recognition to the precept that, where a person must work in a
place of danger and give full attention to his work, his conduct
11-39
may be judged less harshly than that of one who is using a
product in a less inhibiting situation. As the Federal
District Court for the Eastern District of Arkansas observed:
The "voluntariness" with which a worker assigned to a
dangerous machine in a factory "assumes the risk of
injury" from the machine is illusory.
Thus, it appears that most courts will permit a jury to
consider this "economic compulsion" factor in its appraisal of an
assumption of risk defense, since the duties of employment are a
significant factor in deciding whether an employee proceeded
unreasonably in using an obviously dangerous product. It has
been held to be the rule in Pennsylvania as well that the
obligation to do a job must be considered in determining a
standard of conduct for one injured in the performance of his
employment duties. In Hill v. Clark Equipment Co . , a
Michigan court, applying Alabama law, left to the trier of fact
the question whether use of an unguarded machine was contributory
negligence, but pointed out that: "Hill was obliged to use the
forklift truck in his employment."
The Oregon Supreme Court also has pointed out that working
conditions are a relevant element to be considered in assessing
the reasonableness of encountering a known risk for purposes of
establishing the assumption of risk defense outlined in Comment n
to Section 402A:
We feel that working conditions and related
circumstances are a particularly relevant consideration
in an inquiry into the reasonableness of a decision to
encounter a job-related danger. Such factors often will
have a strong influence on that decision, and, in some
cases, they may represent the most important
motivational factors. For example, a worker might fear
that a slowdown in his individual production would slow
down the entire production team and thereby draw the
attention of his boss. If he has a history of such
slowdowns, or of causing excessive spoilage or ruining
machine parts, he may have good cause to fear dismissal.
The job market could be tight, and he may have little
hope of being able to find a new job. Moreover, the
11-40
situation may demand an immediate, hurried decision. It
is certainly possible that, under such circumstances, a
reasonable jury could find that his decision to
encounter a known risk was not unreasonable
Most jurisdictions hold that the economic compulsion factor
presents a jury issue in respect to contributory negligence or
assumption of risk under Section 402A and Comment n. The
impact of this factor may become even more pronounced as the
concept of manufacturer's liability for "occupational diseases"
receives more attention.
While there are jurisdictions which refuse to permit
consideration of "economic necessity" in relation to assumption
of risk, the trend may be to accept it.
The Presence of the Employer
It should be noted that the defendant, the manufacturer of the
machine involved in the litigation , has not been the party who
created the pressure on the worker to act as he did. That party
is his employer. In that regard, a manufacturer may attempt to
absolve himself of liability by asserting that the injured
person's employer was in breach of some obligation to the worker.
For example, it is a tenet of product liability law that a
manufacturer or supplier must warn of hazards associated with the
product. If, however, a court concludes that this duty is
limited to providing cautionary information only to the purchaser
of the product (the employer), an employee who is injured because
he was never warned about a hazard may be prevented from
recovering against a manufacturer who could not escape liability
if the injured party had been a nonworkplace user. The
Restatement approach to the problem is presented at length in the
explanatory notes to Comment n to Section 388, which state that
giving cautionary information to a third person may be
insufficient to relieve the supplier from liability to the
injured party.
The courts have given sharply divergent responses to the
question of whether a manufacturer need only warn its immediate
vendee, the employer, or whether it must assure that the ultimate
11-41
user of the product, the employee, i
associated with the use of the product.
'44
aware of the hazards
Some courts have refused to decide the question as a matter
of law, leaving to the jury the problem of deciding whether a
warning given to an employer is sufficient or whether the
anufacturer must communicate the information to the ultimate
m
user
himself
of the product
246
Other courts base their decision on the nature
Another duty to users which manufacturers attempt to "pass
on" to the employers of industrial users is the obligation to
provide guards or safety devices on hazardous products. Their
attempts in this respect, however, have met with far less success
than in the duty to warn context. Basically, a manufacturer may
not rely on the expectation that the employer will add a safety
device to protect the user of his product, even where a state
safety statute requires the employer to supply such
protection. Of course, where an employer does satisfy his
obligation to provide adequate safety devices, the product is no
longer unreasonably dangerous and recovery against the
manufacturer is precluded at least in regard to claims based on
defective design.
Another group of cases which deal with work-related injuries
focuses upon specific affirmative actions of an employer which
may enable a manufacturer to avoid liability to a product-injured
worker. For example, a manufacturer may avoid liability on a
theory of negligent design where it can show that the injured
party's employer had in fact submitted the design and
specifications from which the injury-producing product was
imposition of defective design
;o
constructed. Simple logic forbi(
liability upon a nondesigner .""" It is uncertain, however,
whether this result will occur under strict liability cases.
One action of an employer which may operate to deprive an
injured worker of his right to recovery against a manufacturer is
the effectuation of an alteration of the product. This was
expressly noted when Section 402A was promulgated. Today,
however, state courts appear to differ as to whether the
manufacturer had a duty to foresee that the manufacturer would
alter the product and enhance its danger. Some courts have
11-42
placed a duty on a manufacturer to design its product in such a
way as to preclude such alteration.
Thus, the presence of the employer is a factor to be
considered in many workplace product liability cases, but the
cases do not agree as to how his actions should relate to the
relationship between the injured worker and the manufacturer of a
product .
Conclusion
It cannot be denied that courts have added judicially created
factors such as experience, economic necessity, and presence of
employer to the statutory compensation schemes enacted in all
jurisdictions, to produce a phenomenon of different treatment of
workplace, as opposed to non-workplace, product injuries. The
result has been a shifting of ultimate costs in regard to
workplace accidents. The costs of these accidents are ultimately
resolved outside of the Worker Compensation system. The Task
Force has considered a number of proposals for change in this
area. In that regard, the reader is directed to discussions in
Chapter VII dealing with contribution and indemnity as applied in
the workplace, p. 88; prohibition or modification of subrogation
by Worker Compensation carriers, p. 95; and Worker Compensation
as a sole source of recovery — Abolishing the Worker's Third Party
Claim, p. 103.
A REVIEW OF PRODUCT LIABILITY DATA
AVAILABLE FROM THE LEGAL SYSTEM
A Survey of Secondary Sources
Introduction
The Legal Study's comprehensive search for caseload data
rtaining to product liability court actions filed from 1970 to
e present, both nationwide and in particular jurisdictions,
veals that there is no large body of such data. Of the state
pe
the p
reveals th
court da„„ ^^^^. — . , ^
has specific data on product liability cases.
Office of the United States Courts also reports such data. from
ces, however, the data are available beginning only in
ent, Dotn nationwiae ana m particular j ur isa ic tions ,
hat there is no large body of such data. Of the state
ta collection services, only one--that of Connec ticut--
fic data on product liability cases. The Administrative
uiiice oi tne uniteu :>Lates uour us aisc
both sources, however, the data are ava:
II-M3
the 1974 reports. A number of private sources have also begun to
collect product liability litigation-related data, although as
yet not very much is available. See Volume III, Legal Study, for
a detailed discussion and listing of the secondary sources
reviewed and the methodology used in the survey.
Sources of Data and Analysis
Annual Report of the Director of the Administrative Office of
the United States Courts . — Since fiscal year 1974 (ending June
30, 1974), the Annual Report of the Director of the
Administrative Office of the United States Courts has provided
data on cases in the Federal District Courts alleging product
liability claims. In fiscal year 1974, data included product
liability cases filed, cases terminated, and cases pending at the
end of the year. In fiscal year 1975, the data were expanded to
include a specific breakdown of cases filed by seven categories:
contract actions; torts to land; torts to personal property;
personal injury by airline, marine, and motor vehicle; and all
other personal injury. These categories remained intact during
fiscal year 1976 (ending June 30, 1976). During fiscal years
1975 and 1976, however, data on terminations and cases pending
were discontinued.
The data compiled show an unquestionable surge in product
liability cases being filed in the U.S. District Courts. The
volume has risen from 1,579 in fiscal year 1974 to 2,886 in
fiscal year 1975 (an increase of 83 percent over 1974) and to
3,696 in fiscal year 1976 (an increase of 28 percent over 1975
and 134 percent over 1974) (see Table II-1). Comparing 1975 and
1976, the relationships of the three broad categories--contrac ts ,
torts to property, and personal in jur y--remain basically constant
( see Table II-2 ) .
When product liability suits are compared to other civil
suits, it becomes clear that products suits involve only a small
portion of the total civil caseload. Although the percentage is
on the rise, products cases represented only 2.8 percent of the
total civil caseload in 1976 (see Table II-3).
Similarly, a comparison of product liability claims to total
personal injury torts indicates that while the number of all
11-44
personal injury claims has remained relatively constant from 1975
to 1976, products claims have increased significantly (see Table
11-4) .
In calendar year 1976, the Administrative Office of the
United States Courts also began to collect data on alleged
damages in product liability suits. Statistics are now available
for the first three calendar months of 1976 on such claims.
These statistics indicate that relatively high amounts of damages
are being claimed. Of the 713 product liability cases filed in
which damages were alleged, total damages claimed were
$605,590,000. The average claim was $849,000.
It should be noted that the Legal Study, Volume III, contains
an amplified discussion of product liability cases in the Federal
courts .
Judic ial Department of Connecticut . -
collect and report data specifically on prod
is Connecticut. Since 1974, data have be
number of product liability cases filed and
docket and trial lists have been maintained
a jury and nonjury breakdown on the trial
list" records the filing of a claim in a co
reflects that portion of docketed cases whic
therefore assigned to a trial date. The so
however, is vehicular-related product liab
detailed statistics are reflected in Tables
II-5 pertains to the Courts of Common Pleas
pertains to the Superior Court, which has e
over claims above $15,000.
-The only state to
uct liability cases
en accumulated on the
disposed of. Both
for this period, with
1 ist . The " docket
urt; the "trial list"
h are ready for and
le subcategor i za tion ,
ility cases. These
II-5 and II-6. Table
, while table II-6
xclusive jurisdiction
Although percentages based on claims in the Court of Common
Pleas must be discounted due to a court reorganization, the data
show clearly that product liability activity is increasing in
Connecticut. From the period covered by the 1974 report to that
of the 1976 report, the total product liability cases filed in
Superior Court have increased by 58 percent. Nonvehicular-
related claims account for the largest increase--66 percent.
During the same period, the total torts caseload increased by
only 23 percent, and the total civil caseload increased by only
11 percent. Among cases assigned to trial, product liability
11-45
cases showed an increase of 36 percent, while all torts cases
showed an increase of only 14 percent, and the total civil
caseload showed a decrease. As a percentage of total activity,
however, product liability cases are not significant. In the
period covered by the 1976 report, new product liability claims
accounted for only 2.6 percent of the total new torts claims and
.5 percent of the total new civil claims. Trials during 1976
showed that product liability cases accounted for only 1.8
percent of the total torts cases tried and 1.0 percent of the
total civil cases tried.
The information concerning product liability cases in
Connecticut does not serve as a basis for projections or comments
on the current status or trends of product liability cases
nationwide. Moreover, it should be noted that the Connecticut
court data do not address the issue of the number of product
liability claims settled without an action ever having been filed
in court.
Related Surveys Conducted by Other Organizations
Survey of product liability cases in the greater Kansas City
area conducted by the Kansas Trial Lawyers Association. --The
Kansas Trial Lawyers Association recently compiled product
liability data, collected in Smith's Jury Verdict Serv ice , for
the greater Kansas City area, covering the years 1967-75. The
survey revealed that product liability cases comprised only 3
percent of all civil cases before a jury in the 9-year period.
This percentage has remained relatively stable during that time.
In addition, the Association discovered that the plaintiff was
successful in only 8 out of 22 cases (36 percent) during that
period. Awards averaged $9,850 per verdict. One-half of the
successful cases involved property damage. No punitive damages
were alleged .
Illinois Jury Verdict Report — Cook County Survey, 1970-75 . — A
survey of products cases in Cook County from 1970 to 1975
revealed that plaintiffs were successful in only 103 of 290
cases, or 35 percent. The average jury award in these cases was
$247,764. A survey of downstate Illinois cases included 82
cases. In 40 of these, or 49 percent, the plaintiff recovered.
11-46
The jury awards in these cases averaged $100,332. These figures
include three verdicts totaling over $12 million.
A year-by-year analysis reveals no substantial increase in
the number of plaintiff verdicts (although in 1975 there was a
substantial leap from 197^--from 33 percent to 43 percent). The
awards, on the other hand, have increased significantly. In the
first half of 1976, the number of suits filed in Cook County has
also increased significantly, by 30 percent (from 589 to 769).
Conclusion
Although more detailed information will become increasingly
available to the public from various sources, there is presently
a dearth of data concerning product liability litigation. The
data that are available suggest that products actions are
increasing significantly. However, products cases represented
only 2.8 percent of the total civil caseload in the Federal
District Courts for fiscal year 1976. In the State of
Connecticut, new claims concerning products in 1976 amounted to
only .5 percent of the total new civil claims. The average
damage claim (to be distinguished from award ) in the Federal
District Courts was $849,000 in the first three months of 1976.
Virtually no statistics exist which reflect the amount of court
time that is being spent on products claims in relation to the
total caseload .
An Independent Survey of Product Liability Appellate Cases
in Selected States
Identification of Sample States
One aspect of the Legal Study involved the selection of a
sample of eight states for purposes of concentrated, more
detailed analysis within the limited time frame. Analysis
consisted of a statistical study of all product liability
decisions reported in the West Publication System since 1965, in
which the law of the eight selected states was applied. Most of
these reported decisions were appellate cases. Both state and
Federal cases were included in the analysis. It should be noted
that Federal courts typically apply the substantive law of the
state in which the court is located.
11-47
The first criterion for the selection of the sample states
was that the particular state must have generated a substantial
number of post-1965 reported (that is, appellate level, except as
noted) decisions in which injuries were alleged to have been
sustained as a result of a defective product. Roughly two-thirds
of the states were eliminated on the basis of insufficient
decisions. Apart from the number of reported decisions, other
more substantive criteria were utilized in the selection process.
Of the group of states which had a sufficient number of decisions
to allow for meaningful statistical analysis, the two primary
bases for selection were: (1) by particular state, the
application of innovative or unorthodox legal theories and
approaches to product liability issues; and (2) on the whole, a
balance between geographical and industrial nature of the states
within the sample group.
Applying these criteria, the states selected were:
Ar i zona
Cal ifornia
111 inois
New Jersey
New York
Pennsylvania
Texas
Wisconsin
Certain states were selected largely for their importance in
relation to the "unorthodox" criterion. California and New
Jersey, for example, were basically selected as a result of their
allegedly liberal approach to product liability issues, stemming
from early acceptance of strict liability principles. New York,
on the other hand, recognizes only a negligence-based cause of
action in defective products cases. Wisconsin is the sole state
with substantial experience in applying comparative fault
principles in products cases and was chosen for that reason. In
contrast to these four states, Arizona and Texas law is consonant
with "traditional" product liability law in most respects.
Illinois and Pennsylvania were selected mainly due to their
highly industrialized nature. The southern and western states,
in contrast, are, on the whole, less industrialized. In general,
the sample state group represents a mix, not only of diverse
approaches to product liability issues, but also of geographic
and demographic characteristics.
11-48
What the Survey Showed
-J
-Introduction . — There are two main portions of the report on
the statistical data collected from the eight sample states. The
first section of the survey deals with the findings of the eight
states as a group, and is useful in providing basic information
as to generalized trends in product liability cases. The second
section involves a state-by-state breakdown of the data and is
relevant, in a limited way, in comparing the trends among the
eight states. The limits of the second section must be
emphasized. It is not possible in a survey of this type to
determine the effect of one particular rule of law in a
particular state. For example, although the data collected from
California decisions are useful in determining, in a broad sense,
whether that state applies "liberal" (that is, plaintiff-
oriented) principles in products cases, the results should not be
seen as an indication of the effect of the elimination of the
"unreasonably dangerous" element from proof of defect. Moreover,
the internal law of a state on any given issue is often
inconsistent, particularly where the highest state court has not
resolved the issue.
Methodology. --The cases from which statistical data were
extracted were located through the use of the West headnote
system. Thus, except for trial-level decisions in the Federal
District Courts and the States of New York, New Jersey, and
Pennsylvania, all decisions included in the survey are of an
appellate nature. All personal injury decisions under the topic
heading "product liability" and other relevant key numbers, where
defective product cases were concentrated, were consulted. All
products cases appearing in the advance sheets located in the
Harvard Law Library by September 29, 1976 were also included in
the study.
' Six hundred fifty-five total decisions were surveyed (see
Table II-7) .
A general problem with the data methodology relates to the
data base. Whether the data base is a valid reflection of the
total number of cases litigated or settled within the states is
unclear. There is no available information to assist in drawing
a conclusion whether appellate cases differ from all cases filed.
11-49
in terms of product class, complexity of legal issues, or size of
damage award. It therefore seems imprudent to speculate as to
how the sample differs from all products cases which are filed.
Data were collected in ^^ categories:
1. Was the case tried in a state or Federal Court?
2. What was the product class?
3. Identify the plaintiff, the defendant, and third
parties (indicate whether the plaintiff is the
injured party) .
4. Year of manufacture of product.
5. Year of injury.
6. Year of decision.
7. Was the injury work-related?
8. Where was the forum?
9. Was the trial a jury trial or nonjury trial?
10. Classify the alleged product defect.
1 1 . Who prevailed?
12. Did a statute limit the amount of recovery?
13- What was the amount of damages?
14. Were damages at issue on appeal?
11-50
Finding s--The Sample States as a Group
J The Forum: State or Federal
Of the 655 cases in the survey, 509, or 78 percent, were
tried in state court. Only 22 percent were tried in federal
court .
Product Class
Of the 2^ product classes specified, the product which is
most frequently the subject of litigation is the automobile or a
part of the automobile (192 cases). The next most frequent class
is assembly line and other industrial type machinery or
components (57 cases). These are followed by construction and
loading equipment (including cranes and other hoisting
apparatus), and escalators (28 cases); ladders and scaffolds (27
cases); chemicals other than adhesives, paints, solvents, and
cleaning products (23 cases); and implements (18 cases).
When product class is compared to growth of litigation data,
it may be seen that automobiles and industrial products account
for much of the increase in caseload. Of the 655 cases in the
study, 413 cases, or 63 percent, were in the 1971-76 period.
Only 37 percent of the cases were disposed of in the 1965-70
period (see Table II-8). This breakdown comports with the
figures gathered by the Administrative Office of the United
States Courts and the Judicial Department of Connecticut to the
effect that products litigation is on the increase.
Parties
In 96 percent of all products cases surveyed, the primary
plaintiff was the injured party, rather than another party who
was attempting to recoup some or all of the losses that had
already been paid to the injured party. As might be expected,
the manufacturer was a defendant in the great majority (79
percent) of the cases. The retailer was a defendant in 33
percent of the cases. Others were sued infrequently. The
employer was listed as a defendant in four percent of the cases,
the lessor in three percent, the installer in five percent, the
wholesaler in five percent, and the manufacturer's supplier in
11-51
five percent. The Worker Compensation insurance carrier and
other insurance carriers were typically not involved as
defendants. The cumulative frequency of occurrence exceeds 100
percent due to the fact that multiple responses were permitted on
this question.
Parties other than the plaintiffs and original defendants
were involved in 198, or 30 percent, of the cases. The third-
party plaintiff category was led by the manufacturer, which
became a third-party plaintiff in 76, or 15 percent, of the cases
in which it was an original defendant. The retailer also became
a third-party plaintiff in very few of the cases in which it was
involved as an original defendant--35 of 216 cases, or 16 percent
of such cases .
The most frequent third-party defendant was again the
manufacturer, which was named as a third-party defendant in 64 of
the cases. The employer was named as a third-party defendant in
50 of the 655 cases--only 8 percent.
Year of Manufacture
Of the 198 cases which stated the year that the product was
manufactured, the median date was 1964. Relatively few cases in
the sample involved injuries resulting from older products.
Thirteen percent of the cases listing the date of manufacture
involved equipment more than 20 years old at the time of the
injury. Only four percent of the cases listing the date of
manufacture involved equipment more than 25 years old.
Year of In j ury
In the 484 cases which provided the year of the injury, the
median date was 1966. It was possible, in 30 percent of the
cases, to compare the interval between the year of manufacture
and the year of injury for several product classes within a
period of 10 years. As shown in Table II-9, most automobile
cases occurred shortly after manufacture, while cases related to
machinery were spread throughout the period, with nearly one-
third involving injuries occurring 10 or more years after
manufacture and about 15 percent involving injuries from products
11-52
more than 20 years old.
patterns.
Other classes showed no significant
'- Year of Decision
For cases in which decisions were reported more than once,
the latest decision was selected for sampling purposes. As noted
in the results concerning product class, 63 percent of the post-
1965 decisions fell within the 1971-76 period. There was a 71
percent increase in litigation from the 1965-70 period to the
1971-76 period.
Work-Related In j ur ies
With work-related injuries, defined to encompass more than
workpl ace- suffered injuries (a truck driver who has an accident
has suffered a work-related injury) roughly half of the products
cases were categorized as involving work-related injuries. In
the 581 cases in which it could be ascertained whether the injury
was work-related, 283 responses were positive, while 298 were
negative. The percentage of work-related injuries rose only
slightly in the 1971-76 period. While work-related injuries
accounted for 46 percent of the cases in the 1965-70 period, they
represented slightly more than 50 percent of the cases in the
later time period. In contrast, cases involving machinery and
tools rose sharply over the two periods (see Table II-9).
The Forum
The forum (court selected by plaintiff(s) for bringing the
action) was most often located in the state of injury, followed
by the home state of plaintiff and then by the state of sale.
The forum was less often located in the manufacturer's state (see
Table 11-10).
Jury or Non-Jury Trial
Of the 552 cases which indicated whether the case was heard
by a jury, 411, or 74 percent, were so heard. Of the 141
remaining cases, 73 were disposed of prior to trial and 68
involved nonjury trials. Thus, of the cases that proceeded to
trial, 86 percent were heard by juries. Where the plaintiff was
11-53
the injured party, 87 percent of the cases which proceeded to
trial were heard by a jury. Only 62 percent of the cases where
the injured party was not the plaintiff were jury trials,
however. There is also a growing trend toward jury trials:
Type of
trial
Pre-1971
1971 and
later
Percentage
increase
Jury
Non-Jury
153
30
258
38
+69
+27
Type of Defect
With defect types categorized as manufacturing defects,
design defects, failure to warn, unavoidably unsafe products,
failure to inspect, and "other", the sample showed that the cases
were evenly split between allegations of manufacturing and design
defects. While allegations of a design defect appeared in 259
cases, there were 243 cases involving manufacturing defects.
Failure to warn was alleged in 130 cases, failure to inspect in
40 cases, and an unavoidably unsafe product was alleged to be
"defective" in 31 cases.
When the type of defect was compared with product class, the
most interesting results involved machinery and chemicals. While
there were 64 allegations of defective design of machinery, there
were only 28 allegations of defective manufacture. In the case
of chemical products, 22 of the cases involved a failure to warn
allegation, while only five cases alleged either a manufacturing
or a design defect.
Pi sposi tion
Of the cases which were decided on the merits, the plaintiff
prevailed in 200, or 51 percent, while the defendant prevailed in
189, or 49 percent. If the 12 cases in which the action was
barred due to its procedural posture are added to the defendant's
column, the split is clearly even between plaintiffs and
defendants. A full 254 cases, or 39 percent of the sample, were
11-54
remanded by the appellate court for further proceedings. The
result differs somewhat from the MAPI survey and the Illinois
Jury Verdict Report, which showed that a somewhat smaller
percentage of products cases resulted in judgments for plaintiffs
in the 1970-75 period. It does, however, conform to the results
found in the survey of downstate Illinois cases, where plaintiffs
prevailed in 49 percent of their actions.
In instances where it was possible to compare the disposition
of the case with the jury or non-jury trial data, the results
indicated that the plaintiff prevailed on the merits in 60
percent of the jury trials. The defendant, on the other hand,
prevailed in 56 percent of the nonjury trials. This figure may
be misleading, however, as someone other than the injured party
is frequently the plaintiff in nonjury trials.
In terms of the relation between the disposition of the case
and the type of defect, plaintiffs prevail more frequently in
manufacturing defect cases than in design defect cases. While
the plaintiff prevailed in 58 percent of the manufacturing defect
cases, the defendant prevailed in 54 percent of the design defect
cases. The defendant also won 51 percent of the failure to warn
cases .
The trend of disposition shows a slight move toward the
plaintiff in the more recent cases. While the defendant
prevailed in 51 percent of the cases in the 1965-70 period, the
plaintiff won 53 percent of the cases in the 1971-76 period.
Statutory Limits on Recovery
Of the entire sample, only one case involved a statute that
placed limitations on the recovery by a prevailing plaintiff.
California's wrongful death statute precludes recovery for pain
and suffering .
Damages
Data involving damages were extracted only from those cases
in which the plaintiff ultimately prevailed. If a verdict for
the plaintiff was reversed on appeal, for example, the damages
data were not considered. Information on damages was provided in
11-55
157 of the cases in which the plaintiff prevailed. Very few of
these cases, however, broke down the damages by type. No
meaningful figures can be offered, for example, on damages
awarded for pain and suffering. The average damage award in the
157 cases was $181,401. The trend is clearly in the direction of
recovery of greater damages by injured parties. While the
average damage award was $104,202 in the 1965-70 period, the
average award in the 1971-76 period was $221,514 (see Table II-
11). Again, this finding agrees with the Illinois Jury Verdict
Report, which showed a significant recent increase in damage
awards. When broken down by product class, the greatest amounts
of damages were recovered in cases involving machinery and
automobiles .
Damages on Appeal
Of the 58 cases where the amount of damages was at issue on
appeal, the award was affirmed in 44 cases and reduced in six
cases. In eight cases, the issue was remanded to a trial court
for disposition.
Find ings : The individual sample states
The Forum : State or Federal
All states, with the notable exception of Pennsylvania,
indicated a consistent pattern of high incidence of state court
cases. In Pennsylvania, more cases were decided in the Federal
court than in the state court (see Table 11-12).
Year of Decision
Although all states showed an increase in cases decided from
the 1965-70 period to the 1971-76 period, some states indicated
faster growth than others. While California showed only a 16
percent increase and Arizona only a 25 percent increase. New
Jersey showed a 211 percent increase and Wisconsin a 167 percent
increase (see Table 11-13).
11-56
Work-Related In j ur ies
The only states where more work-related than non-work-related
cases appeared were the highly industrialized states of Illinois
and Pennsylvania, along with Wisconsin. California and New
Jersey were the states which showed the highest percentages of
non-work-related injuries (see Table 11-14).
Pi sposi tion
Plaintiffs were most successful in cases in the States of
California and Texas. While most states showed a fairly even
split between plaintiffs and defendants, the plaintiff prevailed
in 58 percent of the California cases which were decided on the
merits, and in 63 percent of the Texas cases which were decided
on the merits. Of the states in which there was a substantial
number of cases in the sample, the defendant was most successful
in Illinois, where it prevailed in 56 percent of the cases
decided on the merits (see Table 11-15). Thus, the Illinois Jury
Verdict Report is not substantially in conflict with the results
obtained here.
Damages
Of the five states--Cal ifornia , Illinois, New York,
Pennsylvania, and Texas--which provided a substantial number of
cases where damage awards were stated, the highest damages were
awarded in California, followed by Texas. The lowest awards were
made, on the average, in Illinois. Insufficient numbers of cases
in the Arizona, New Jersey, and Wisconsin samples did not reveal
the pertinent damages information necessary to draw valid
conclusions regarding damage awards in those states. The damages
data are shown in Table 11-16). It is interesting to note that,
of the five sample states for which sufficient data were
available, the highest awards were made in those states--
California and Texas--where the plaintiff most often prevails,
and that the lowest awards were made in Illinois, where the
defendant most often prevails.
11-57
NOTES TO CHAPTER II
''prosser, "The Fall of the Citadel (Strict Liability to the
Consumer)," 50 Minn . L. Rev. 791 (1966).
^32 N.J. 358, 161 A. 2d 69 (I960).
^59 Cal. 2d 57, 377 P . 2d 897 (1963).
Prosser, supra note 1, 50 Minn . L. Rev . at 803.
See Kiely, "The Art of the Neglected Obvious in Products
Liabil ity Cases: Some Thoughts on Llewellyn's The Common Law
Tradition," 24 DePaul L. Rev. 914 (1975); Wade, "On the Nature of
Strict Liability for Products," 44 Miss. L.J. 825 (1973); Keeton,
"Product Liability and the Meaning of Defect," 5 St_. Mary' s L.J.
30 (1973); Hoenig, "Product Designs and Strict Tort Liability:
Is There a Better Approach," 8 S.W.U. L. Rev . 109 (1976); Green,
"Strict Liability under Sees 402A and 402B: A Decade of
Litigation," 54 Tex. L. _Rev. 1185 (1976).
See Kiely, supra note 5; Wade, supra note 5; Keeton, supra
note 5.
7
See Wade, supra note 5; Keeton, supra note 5; Green, supra
note 5 .
o
See Schwartz, Comparative Negligence (1974).
0
See Klemme, "The Enterprise Liability Theory of Torts," 47
U. Colo. L. _Rev. 153 (1976).
1 0
Hoenig, "Product Designs and Strict Tort Liability: Is
There a Better Approach?"; 8 Sw. U.L. Rev. 109, 111 (1976)
(footnote omitted).
^''59 Cal. 2d 57, 377 P . 2d 897 (1963).
""^377 P. 2d at 900.
1 3
See , e.g. , Jiminez v . Sears , Roebuck ^ ^ ., 4 Cal. 3d 379,
482 P. 2d 681 (1971); Pike v. Frank G. Hough Co., 2 Cal. 3d 465,
467 P. 2d 229 (1970) .
""^8 Cal. 3d 121, 501 P . 2d 1153 (1972).
See Beron v. Kramer-Trenton Co., 402 F. Supp. 1268 (E.D.
Pa. 19757.
1 ^
See Kirkland v. General Motors Corp. , 521 P . 2d 1353 (Okla.
1974); Phillips V. Kimwood Machine Co., 269 Ore. 485, 525 P. 2d
11-58
1033 (1974); Turner v. General Motors Corp. , 514 S.W. 2d 497
(Tex. Civ. App. 1974).
17
Seattle-First National Bank v. Tabert, 86 Wash. 2d 145, 542
19
P. 2d 774 (1975).
1 R
Phillips V. Kimwood Machine Co . , supra note 7.
See Reyes v. Wyeth Laboratories, 498 F . 2d 1264 (5th Cir.
1974) ( applying Texas law) .
^°See, e.g. , Polk v. Ford Motor Co . , 529 F.2d 259 (8th Cir.)
(applying Missouri law); 0 . S. Stapley Co . v. Miller , 103 Ariz.
556, 447 P. 2d 248 (1968); West v. Caterpillar Tractor Co. 336 So.
2d 80 (Fla. 1976); Suvada v. White Motor Co., 32 111. 2d 612, 210
N.E.2d 182 (1965) .
21
22
Dippel V. Sciano, 37 Wis. 2d 443, 155 N.W.2d 55 (1967).
Codling V. Paglia, 32 N.Y.2d 330, 345 N.Y.S.2d 461 (1973).
23
>
24
'See Micallef v. Miehle Co . , Div ision of Miehle-Goss- Dexter ,
Inc. , 39~N.Y.2d 376, 384 N.Y.S.2d 115 (197677
Id.
^Hoppe V. Midwest Conveyor Co., 485 F.2d 1196 (8th Cir.
1973) ( appl ying Missouri law) ; Dorsey v. Yoder Co . , 331 F. Supp.
753 (E.D. Pa. 1971), aff 'd, 474 F . 2d 1339 (3d Cir. 1973); Cronin
V. J . B. E. Olson Corp . , supra note 5; Bal ido v. Improved
Machinery, Inc . , 29 Cal. App. 3d 633, 105 Cal. Rptr . 890 (1973).
See Wade, "On the Nature of Strict Liability for Products,"
44 Miss. L.J. 825 (1973) •
27
See , e .g
Schenebeck v. Sterling Drug, 423 F.2d 919 (8th
Cir. 1970) (applying Louisiana 1 aw) ; G¥r st v. General Motors
Corp. , 207 Kan. 2, 484 P. 2d 47 ( 1 97 lTr'MTc_al_l_ef v. Miehle Co. ,
Division of Miehle-Goss-Dex ter , Inc., supra note 14.
28,
Mai
29,
*Keeton, "Products Liability and the Meaning of Defect," 5
St. Mary' s L. J. 30, 39 (1973).
Kar j ala v. Johns-Manville Products Corp . , 523 F . 2d 155 (8th
Cir. 1 975 ) Tapplying Minnesota law) ; Borel v. Fibreboard Paper
Products Corp. , 493 F.2d 1076 (5th Cir. 1973), cert, denied , 419
U.S. 869 (1974); Chr istof fer son v. Kaiser Foundation Hospitals ,
15 Cal. App. 3d 75, 92 Cal. Rptr. 825 (1971); Jones v. Hittle
Service, Inc . , 219 Kan. 627, 549 P . 2d 1383 (1976); Cunningham v.
Charles Pfizer & Co., 532 P . 2d 1377 (Okla. 1974).
30
Phillips V. Kimwood Machine Co., supra note 7.
11-59
^""Byrns v. Riddell , Inc. , 550 P . 2d 1065 (Ariz. 1976).
Dorsey v. Yoder Co . , supra note 16.
^^Wade, supra note 17, 44 Miss. L. J. at 837-38.
■^ Restatement (Second ) of Torts Sec. 402A, comment i.
^ Se£, e.g., Sherrill v. Royal Industries , Inc . , 526 F.2d 507
(8th Cir. 1975) ( applying Nebraska law) ; Kar jala v. Johns-
Manv ille Products Corp . , supra note 20; Car srell v. Altec
Industries, Inc . , 335 So. 2d 128 (Ala. 1976).
See , e.g., Seattle-First National Bank v . Tabert , supra
note 8 .
37
See , e.g.. Burton v . L . 0. Smith Foundry Products Co . , 529
F.2d 108 (7th Cir. 1976) (applying Indiana lawTj Sherrill v.
Royal Industr ies , Inc . , supra note 26.
^ See , e.g. , Davis v. Fox River Tractor Co . , 518 F.2d 481
(10th Cir. 1975 ) (applying Oklahoma law); Pike v. Frank G. Hough
Co . , supra note 4; Casey v. Gif ford Wood Co . , 61 Mich. App. 208,
232 N.W.2d 360 (1975); Palmer v. Massey-Ferguson , Inc . , 3 Wash.
App. 508, 476 P. 2d 713 (1970) .
^^301 N.Y. 468, 95 N.E.2d 802 (1950). Campo was overruled by
Micallef v. Miehle Co . , Division of Miehle-Goss- Dexter Inc . ,
supra note ^W.
40
Dorsey v. Yoder Co . , supra note 16, 331 F. Supp. at 759.
^^The T.J. Hooper, 60 F.2d 737 (2d Cir. 1932); Hall v. E.I.
du Pont de Nemours & Co., Inc . , 345 F. Supp. 353 TE.D.N.Y.
1972); Ford Motor Co. v. Thomas, 231 So. 2d 88 (Ala. 1970); Hill
V. Husky Briquetting, Inc . , 54 Mich. App. 17, 220 N.W.2d 137,
aff ' d, 393 Mich. 136, 223 N.W.2d 290 (1974).
42
Cunningham v. MacNeal Memorial Hospital , 47 111. 2d 443,
266 N.E.2d 897 (1970); Gelsumino v. E.W. Bliss Co., 10 111. App.
3d 604, 295 N.E.2d 110 (1973) •
4?
^Stanfield v. Medalist Industries , Inc . , 34 111. App. 3d
635, 340 N.E.2d 276 (1975) .
44
See , e.g., Ulrich v. Kasco Abrasives Co . , 532 S.W.3d 197
(Ky. 1976) ; Kuisis v. Baldwin-Lima-Hamilton Corp., 457 Pa. 321,
319 A. 2d 914 (1974) .
45.
Id
46
Hoenig, supra note 1.
11-60
47
Henderson, "Design Defect Litigation Revisited," 61 Cornell
L. _Rev. 541 (1976).
48
Twerski et al . , "The Use and Abuse of Warnings in Products
Liability — Design Defect Litigation Comes of Age," 61 Cornell L^.
Rev. 495 (1976).
49
Sterling Drug, Inc. v. Yarrow, 408 F.2d 978 (8th Cir. 1969)
(applying South Dakota law); Gherna v . Ford Motor Co . , 24 6 Cal .
App. 2d 639, 55 Cal. Rptr . 94 (1966); Restatement (Second) of
Torts Sec. 388 (1965) .
50
Basko v. Sterling Drug, Inc., 416 F . 2d 417 (2d Cir. 1969)
(applying Connecticut law); Cannifax v. Hercules Powder Co., 237
Cal. App. 2d 44, 46 Cal. Rptr. 552 (1965); RTstatementTSecond )
of Torts Sec . 402A.
51
) ■
'i .
53,
Davis V. Wyeth Laboratories, Inc . , 399 F.2d 121 (9th Cir.
1968) ( applying Montana law).
'Walsh V. National Seating Co . , 411 F. Supp. 564, 570 (D.
Mass. 1976) .
See , e.g., Jackson v . Coast Paint & Lacquer Co . , 499 F . 2d
809 (9th Cir. 19741 (applying Montana lawT; Basko v. Sterling
Drug , Inc . , supra note 2; Barth v. B . F . Goodrich Tire Co . , 265
Cal. App. 2d 228, 71 Cal. Rptr. 306 (1968) . But see Hasson v.
Ford Motor Co. , 51 Cal. App. 3d 104, 123 Cal. Rptr. 798 (1975).
54
See Annot., "Failure to Warn as Basis of Liability Under
Doctrine of Strict Liability in Tort," 53 A.L. R. 3d 239, Sec.
2[b] (1973); Noel, "Products Defective Because of Inadequate
Directions or Warnings," 23 S. W.L.J. 256, 260 (1969).
55
See, e.g., Wagner v. Larsen, 257 Iowa 1202, 136 N.W.2d 312
(1965); Penn v. Inferno Manufacturing Corp., 199 So. 2d 210 (La.
App.), aff'd, 215 La. 27, 202 So. 2d 649~TT967).
56
See , e.g. , Tinnerholm v . Parke-Dav is _& C_o . , 285 F . Supp .
432 (S.D.N.Y. 1968)"r~a7f'd, 411 F.2d 48 (2d Cir. 1969) (applying
New York law) .
57
Basko V. Sterl ing Drug , Inc . , supra note 2; Dav is v. Wyeth
Laboratories , supra note 3.
58,
427
Basko V. Sterl ing Drug, Inc., supra note 2, 416 F.2d at
59
993.
Sterling Drug, Inc. v. Yarrow, supra note 1, 408 F.2d at
60
Incollingo v. Ewing , 444 Pa. 263, 282, A. 2d 206 (1971).
11-61
Jackson v. Coast Paint ^ Lacquer Co., supra note 5;
Phillips V. Kimwood Machine Co., 269 Ore. 4'B5", 525 P . 2d 1033
(1974) .
62
1039.
63
Phillips V. Kimwood Machine Co., supra note 13, 525 P . 2d at
64
Restatement (Second)of Torts Sec. 402A, comment j (1965).
Restatement (Second) of Torts Sec. 402A, comment h (1965).
^^Hamilton v. Hardy, 549 P. 2d 1099 (Colo. App. 1976);
Cunningham v. Charles Pfizer & Co . , 532 P . 2d 1377 (Okla. 1974);
Phillips V. Kimwood Machine Co., supra note 13.
66
Davis V. Wyeth Laboratories , Inc., supra note 3.
67
).N
68
Hall V. E. I. du Pont de Nemours & £o., 345 F. Supp. 353
(E.D.N.Y. 1972); Cannifax v. Hercules Powder Co., supra note 2.
McCormack
Hankscraft Co., 278 Minn. 322, 154 N.W.2d 488
(1967).
6q
^Mountain v. Procter & Gamble Co . , 312 F. Supp. 534 (D. Wis.
1970); Alberto-Culver Co. v. Morgan , 444 S.W.2d 770 (Tex. Civ.
App. 19F9T:
70
(1976)
71
72
2 Frumer & Friedman, Products Liability Sec. 8.03[1] at 161
See , e.g., Basko v. Sterl ing Drug , Inc . , supra note 2.
Barnes v. Litton Industrial Products , 409 F. Supp. 1353
(E.D. Va. 1976).
73,,.
.si(
74,
'Kidwell , "The Duty to Warn: A Description of the Model of
Decision," 53 Tex. L. Rev. 1375, 1403 (1975).
See , e.g., D' Arienzo v. Clairol , Inc . , 125 N.J. Super. 224,
310 A. 2d 106 (1973); Perma-Strate Co. v. Gemus , 58 Tenn. App.
325, 430 S.W.2d 665 (1968) .
75,
2'
76,
'See , e.g. , Casetta v . United States Rubber Co . , 260 C a 1 .
App. 2d 792, 67 Cal. Rptr . 645 (1968) .
See , e.g., Dav is v. Wyeth Laboratories, Inc . , supra note 3;
Reyes v . Wyeth Laboratories, Inc . , 498 F.2d 1264 (5th Cir . ) ,
cert . denied , 419 U.S. 1096 (1974) (applying Texas law).
77
See , e.g. , Kaempfe v . Lehn _& Fink Products Corp . , 21 App .
Div. 2d 197,~2T9 N.Y.S.2d 840 (1964); Alberto-Culver Co. v.
Morgan , supra note 21 .
11-62
78
79,
See Kidwell, supra note 25.
See, e.g., Posey v. Clark Equipment Co., 409 F.2d 560 (7th
Cir. 1969) , cert, denied , 396 U.S. 940 (19697 (applying Indiana
law) . See al so 2 Hursh & Bailey, American Law of Products
Liability 2d Sec. 8:15 at 181 (1974).
80
1
81
See , e.g., Vroman v. Sears , Roebuck & _Co, 387 F.2d 732 (6th
Cir. 1967 ) ( applying Michigan law).
Blim V. Newbury Industries, Inc . , 443 F.2d 1126 (10th Cir.
1 97 1 ) ; Haugen v . Minnesota Mining & Manuf ac tur ing Co . , 550 P . 2d
71 (Wash. App. 197'57~;
82
See, e.g., McCormack v. Hankscraft Co., supra note 20.
83
Jackson v. Coast Paint _& Lacquer Co . , supra note 5;
Rindlisbaker v. Wilson, 95 Idaho 752, 519 P . 2d 421 (1974) .
84
85,
Moran v. Faberge, Inc., 273 Md . 538, 332 A. 2d 11 (1975).
Burton v. L.O. Smith Foundry Products Co., 529 F.2d 108
(7th Cir. 1976) (applying Indiana law) cf; Martinez v. Dix ie
Carriers, Inc . , 529 F.2d 457 (5th Cir. 197^) (applying Texas law)
(Professional user).
86
87
Restatement (Second) of Torts Sec. 388 (1965).
Restatement (Second) of Torts Sec. 402A (1965).
88..,.
Kidwell, supra note 25, 53 Tex . L. Rev . at 1399.
^^Jones V. Hittle Service, Inc. , 549 P . 2d 1383 (Kan. 1976);
Morris v. Shell Oil Co. , 467 S.W.2d 39 (Mo. 1971 ) .
^^Jacobson v. Colorado Fuel & Iron Corp. , 409 F.2d 1263 (9th
Cir. 1 969 ) ( applying Montana law); Barnes v. Litton Industrial
Products , supra note 24.
91
92
93
94
Basko V. Sterling Drug , Inc . , supra note 2.
Sterl ing Drug Co . v. Yarrow, supra note 1.
Davis V . Wyeth Laboratories , Inc . , supra note 3
McCormack v. Hankscraft , supra note 20.
95
Crocker v . Winthrop Laboratories , Division of Sterl ing
Drug , Jn£ . , 514 S . W.2d 429 ( Tex. 1974).
Q6
^ Prosser, Handbook of the Law of Torts Sec. 67, at 453 (3d
ed. 1964).
11-63
97
98,
Id. at il52
Campo V. Scofield , 301 N.Y. 468, 95 N.E.2d 802 (1950),
overruled, Micallef v. Miehle Co . , Division of Miehle-Goss
Dexter, Inc., 39 N.Y. 2d 376, 384 N.Y. S. 2d 115 (197"^.
99
Micallef v. Miehle Co
Div ision of Miehle-Goss Dexter,
Inc . , supra note 3 • See al so Pike v . Frank G . Hough Co . , 2 Cal .
2d~ 465, 467 P. 2d 229 (1970); Palmer v. Massey-Ferguson , 3 Wash.
App. 508, 476 P. 2d 713 (1970) .
See Noel, "Defective Products: Abnormal Use, Contributory
Negligence, and Assumption of Risk," 25 Vand . L. Rev . 93, 96
(1972) .
1 0 1
See , e.g.. Morrow v. Trailmobile , Inc . , 12 Ariz. App. 578,
473 P. 2d 780 (1970); Patten v. Logemann Brothers Co., 263 Md .
364, 283 A. 2d 567 ( 1 971 ) ; Parsonson v. Construction Equipment
Co., 386 Mich. 61, 191 N.W.2dT55 TTTT 1 ) ; Jennings v. Tamaker
Corp., 42 Mich. App. 310, 201 N.W.2d 654 ( 1 9 72T;
1 02
Restatement (Second ) of Torts Sec. 402A, Comment n. See
al so Prosser, supra note 1, Sec. 78 at 539; Noel, supra note 5,
25 Vand . L. Rev . at 121 .
103
See Thomas
Supp. 255~(E.D. Pa. 197677
104
1976) .
105
American Cystoscope Makers, Inc., 414 F.
See Heil
Berkebile
(Pa. 1975T
106
Heil Co. V
107c.
Sweeney v
N.E.2d 170 (1970)
Co . V. Grant , 534 S.W.2d 916 (Tex. Civ. App.
^- Brantly Helicopter Corp., 337 A . 2d 893, 901
Grant , supra note 9.
Max A.R. Matthews & Co., 46 111. 2d 64, 264
108
'. P'
109
'See , e.g. , Ford v. Harnischfeger Corp . , 365 F. Supp. 602
(E.D. Pa. 197T1 Tapplying Pennsylvania lawTT
Bartkewich v. Billinger, 432 Pa. 351, 247 A. 2d 603 (1968).
^ ^^McDevitt V. Standard Oil Co., 391 F.2d 364 (5th Cir. 1968)
(applying Texas lawTT See also Par zini v. Center Chemical Co . ,
234 Ga. 868, 218 S . E."2d~580 ( 1 975 ) ; D'Arienzo v. Clairol , Inc. ,
125 N.J. Super. 224, 310 A. 2d 106 (^97JT'.
1 1 1
(1975) .
1 12
Collins V. Musgrave, 28 111. App. 3ci 307, 328 N.E.2d 649
Henderson v. Ford Motor Co., 519 S.W.2d 87 (Tex. 1975).
11-64
^ ^ ^ See Rhoad_s v. Service Machine Co . , 329 F . 2d 36? (E.D. Ark.
1971 ) .
Restatement (Second) of Torts Sec. 402A, Comment n. See
al so Twerski , "Restructuring Assumption of Risk in the Products
Liability Era," 60 Iowa L. Rev . 1 (197^).
1 15
1976) .
1 16,
'Johnson v. Clark Equipment Co., 5^7 P . 2d 132, I^^O (Ore.
See Hender son v. Ford Motor Co . , supra note 17.
See Erikson v. Sears, Roebuck & Co., 240 Cal . App. 2d 793,
50 Cal. Rptr. 143 (196Fr
Stewart v. Von Sollrig Hospital , Inc., 24 111. App. 3d
1 17
al .'
1 18
599, 321 N.E.2d 428 (1974) .
"* ''^McCurter v. Norton Co., 263 Cal. App. 2d 402, 69 Cal
Rptr. 493 (1968).
120
Erickson v. Sears, Roebuck & Co., supra note 22. See also
Thomas v. American Cystoscope Makers, Inc., supra note 8
121
General Motors Corp. v. Hopkins, 535 S.W.2d 880 (Tex. Civ
App . 1976) . See also Edwards v . Sears, Roebuck & £o. , 512 F.2d
276 (5th Cir. 197 51 Tapplying Mississippi law) .
122
1976) .
123
See , e .
Tucci V. Bossert, 385 N.Y.S.2d 328 (App. Div.
8
See Thomas v. American Cystoscope Makers, Inc., supra note
124
See , e.g., Evans v. General Motors Corp . , 359 F.2d 822
(7th Cir.), cert. denied , 385 U.S. 836 (1966) (applying Indiana
law). See also Schemel v. General Motors Corp., 384 F.2d 802
(7th Cir. 1967) (applying Indiana law) .
""^^Larson v. General Motors Corp. , 391 F.2d 495 (8th Cir.
1968) (applying Michigan lawTl "See al so Dyson v. General Motors
Corp. , 298 F. Supp. 1064 (E.D. Pa. 1969); Ellithorpe v. Ford
Motor Co., 503 S.W.2d 516 (Tenn. 1973).
See, e.g., Dunham v. Vaughan , 86 111. App. 2d 315, 229
N.E.2d 684, aff'd, 42 111. 2d 339, 247 N.E.2d 401 (1967).
""^^Findlay v. Copeland Lumber Co . , 265 Ore. 300, 509 P . 2d 28
(1973) .
1 p Q
Holmgren v. Massey-Ferguson , Inc . , 394 F. Supp. 910
(D.N.D. 1974), rev'd on other grounds, 516 F.2d 856 (8th Cir.
1975) (applying N.D. lawT^
11-65
129
See Cepeda v. Cumberland Engineering Co., 138 N.J. Super.
344, 351 A. 2d 22 (App. Div. 1976); Bartkewich v. Billinger , supra
note 14.
130
131
32 N.Y.2d 330, 298 N.E.2d 622 (1973).
Micallef v . Miehle Co . , Division of Miehle-Goss Dexter ,
Inc . , supra note 3-
132
(1970) .
133
Stephan v. Sears, Roebuck & £0, 110 N.H. 248, 266 A. 2d 855
Dippel V. Sciano, 37 Wis. 2d 443, 155 N.W.2d 55 (1967).
134
135
Id.
See, e.g., Hagenbuch v. Snap-On-Tools Corp., 339 F. Supp.
676 (D.N.H. 1972).
136
1976)
West V. Caterpillar Tractor Co., 336 So. 2d 80 (Fla.
''^'^Kirkland v. General Motors Corp., 521 P . 2d 1353 (Okla.
1974) .
138
Schuh V. Fox River Tractor Co., 63 Wis. 2d 728, 218 N.W.2d
279 (1974).
1 39
Sun Valley Airlines , Inc . v . Avco-Lycoming Corp . , 411 F .
Supp. 598 (D. Idaho 1976) .
^^^Edwards v. Sears, Roebuck & Co . , 512 F . 2d 276 (5th Cir.
1975) ( applying Mississippi 1 aw) ; see Gilbertson v. Tryco
Manufacturing Co. , Inc . , 492 F.2d 958 (8th Cir. 1974) (applying
Minnesota law); Chapman v. Brown , 198 F. Supp. 79 (D. Hawaii),
aff 'd, 304 F.2d 149 (9th Cir. 1962); Haney v. International
Harvester Co. , 294 Minn. 375, 201 N.W.2d 140 (1972); Etten v. Ava
Truck Leasing, Inc. , 53 N.J. 463, 251 A . 2d 278 (1969); Ritter v.
Narragansett Electric Co., 109 R.I. 176, 283 A. 2d 255 (1971);
Netzel v. State Sand & Gravel Co. , 51 Wis. 2d 1, 186 N.W. 2d
258, 262 (1971).
1 4 1
See Schwartz, "Strict Liability and Comparative
Negligence," 42 Tenn . L. Rev . 171 (1974); Feinberg,
"Applicability of a Comparative Negligence Defense in a Strict
Products Liability Suit Based on Sec. 402A of the Restatement of
Torts (2d) (Can' Oil and Water Mix?)," 42 Ins. Counsel J_. 39
(1975) .
142
143
Kinard v. Coats Co. , 553 P . 2d 835 (Colo. App. 1976).
Strakos v. Gehring, 360 S.W.2d 787, 798 (Tex. 1962).
11-66
144
Kossifos V. Louden Machinery, 22 111. App. Sd 587, 317
N.E.2d 749 (1974); Stanfield v. Medalist Industries, Inc . , 17
111. App. 3d 996, 309 N.E.2d 104 (1974) .
^^^Symons v. Mueller Co., 526 F.2d 13 (10th Cir. 1975)
(applying Kansas law) .
^^^Edwards v. E.I, du Pont de Nemours Co. , 183 F.2d 165 (5th
Cir. 1950 ) ( applying Georgia lawTT
147
See Comment, "Another Look at Strict Liability: The
Effect on Contribution among Tortfeasors," 79 Dickinson L . Rev .
125 (1974).
148
The
1939 version of the Uniform Contribution Among
Tortfeasors Act has been adopted in 10 States. The 1955 U. C. A.T,
Act has been adopted in 7.
149
Fenton v. McCrory Corp. , 47 F.R.D. 260 (W.D. Pa. 1969).
^^ See, e.g. , Burke v. Skyclimber , 57 111. 2d 542, 316 N.E.2d
516 (1974); Beaumont v. Warner & Swasey Co. , 36 App. Div 2d 894,
320 N.Y.S.2d 201 (1971 ); Wagner v. United Hoisting Co. , 37 Misc.
2d 761, 23^ N.Y.S.2d 819 (1962) . See also Zeremski , "Expansion
of Third Party Recovery: Common Law Indemnity, Contribution,
Or?" 63 111. B.J. 684 (1975) .
151
See McClish v. Niagara Machine & Tool Works, 266 F. Supp.
987 (S.D. Ind] 1967) ; South Austin Drive-In Theatre v. Thomison ,
421 S.W.2d 933 (Tex. Civ. App. 1967T^
1 52
See , e.g. , Vergott v . Deseret Pharmaceutical Co . , 463 F . 2d
12 (5th Cir. 1972); South Austin Drive-In Theatre v. Thomison ,
supra note 9; Brad ford v. Bendix-Westinghouse Automotive Brake
Co., 517 P. 2d 406"^ ( Colo. App"! 1973) ; Williams~v . Chrysler Motor
Co., 271 So. 2d 551 (La. App. 1972); Lewis v. Amchem Products,
Inc. , 510 S.W.2d 46 (Mo. App. 1974); Heil Co v. Grant, 53^ S.W.2d
916 (Tex. Civ. App. 1976).
153
Goldstein v. Compudyne Corp., 45 F.R.D. 467 (S.D.N.Y.
1968); Rekab, rn£- v. Frank Hubetz & Co. , 261 Md . 141, 274 A. 2d
107 (1971).
154
Comment, supra note 5, 79 Dickinson L. Rev. at 131.
1 55
See , e.g. , American Auto Insurance Co . v . Moll ing , 239
Minn. 74, 57 N.W.2d 847 (1953) •
156
White V. Texas Eastern Transmission Corp., 512 F.2d 486
(5th Cir. 1975) (applying Louisiana law); Prosky v. National Acme
404 F '
Co. ,
Supp. 852 (E.D. Mich. 1975); Jennings v. Franz
Torwegge Machine Works, 3^7 F. Supp. 1288 (W.D. Va . 1972); Auld
V. Globe Indemnity Co., 220 F. Supp. 96 (W.D. La. 1963); Howard
11-67
V. Wilson Concrete Co. 57 F.R.D. 8 (D. Mo. 1972); Schweizer v.
Elox Division of Colt Industries, 133 N.J. Super. 297, 336 A. 2d
73 (1975).
1 57
Schwei zer v. Elox Div ision of Colt Industries , supra note
14, 336 A. 2d at 79; Auld v. Globe Indemnity Co. supra note 14,
220 F. Supp. at 101 .
Louisiana, Maine, Pennsylvania and Rhode Island, cited in
Comment, supra note 5, 79 Dickinson L. Rev iew at 131.
159
160,
Maio V. Fahs, 339 Pa. 180, 14 A. 2d 105 (19^0).
Chamberlain v. Carborundum , 485 F.2d 31, 33 (3cl Cir. 1973)
(applying Pennsylvania law).
1 A 1
See Kuziw v. Lake Engineering Co . , 385 F. Supp. 827 (N.D.
111. 1974). But see Kessler v. Bowie Machine Works , Inc . , 501
F.2d 617 (8th Cir. 1974) •
162
Carlson v. Smogard , 215 N.W.2d 615 (Minn. 1974). See also
Hanley v. International Harvester, 29^ Minn. 375, 201 N.W.2d 140
(1972) .
163
t 1
164
17
165
'Hanley v. International Harvester , supra note 20, 201 N.W.
2d at 144.
^Vandermark v. Ford Motor Co . , 61 Cal. 2d 256, 391 P . 2d
168, 171-172 (1964).
166
21 Cal. App. 3ci 694, 98 Cal. Rptr . 702 (1971).
98 Cal . Rptr . at 705-706.
"^Beckerman v. Walter J . Munro , Inc . , 25 App. Div. 448, 266
N. Y.S.2d 996 (1966) .
^^^Duckworth v. Ford Motor Co. , 320 F.2d 130 (3d Cir. 1963);
Chapman v. General Motors Corp., 242 F. Supp. 94 (E.D. Pa. 1965);
Barth v. G. P. Goodrich Tire Co . , 15 Cal. App 3d 137, 92 Cal Rptr.
809 (1971); Ford Motor Co. v. Russell & Smith Ford Co., 474
S.W.2d 549 (Tex. Civ. App. 1971).
1 69
Compare McDonald v. Blue Jeans Corp . , 183 F. Supp. 149
(S.D. N.Y. I960) with Beckerman v. Walter J. Munro , Inc . , 25 App.
Div. 448, 266 M.Y.ST2d 9W ( 1 9"66T: See also Auld v. Globe
Indemnity Co . , 220 F. Supp. 96 (W.D. La. iWS) .
^'^^Watz V. Zapata Off-Shore Co. , 431 F . 2d 100 (5th Cir. 1970)
(applying Texas law) .
1 7 1
See , e.g., McPhee v. 01 iver Tyrone Corp . , 353 F. Supp. 601
(N.D. Miss. 1972).
11-68
1 72
See , e.g. , Carulof f v . Emerson Rad io _& Phonograph Corp . ,
445 F.2d 873 (2d Cir" 1973) (applying New York law) ; BoTg-Warner
Corp V. White Motor Co. , 3^4 F.2d 412 (5th Cir. 1965) (applying
Texas law); Delaney v. Towmotor Corp. , 339 F.2d 4 (2d Cir. 1964)
(applying New York law).
'''''^See, e.g . , Feinstein v. Greer Hydraulics, 457 S.W.2d 789
(Mo. 1970); Mixter v. Mack Trucks , Inc . , 224 Pa. Super. 313, 308
A. 2d 139 (1973).
174
American Radiator Co. and S.S. Corp v. Titan Valve
Manufacutring Co . , 246 F.2d 947 (6th Cir. 1957) (applying Ohio
law) ; Wells v. Web Machinery, 20 111. App. 3d 545, 315 N.E.2d 301
(1974); Monahan v. Ford Motor Co. , 231 N.Y.S. 2d 187 (Sup. Ct .
1962) ; Reefer Queene Co . v . Mar ine Construe tion ^ Design Co . , 73
Wash. 2d 774, 440 P. 2d 453 (1968) .
'''''^Tromza v. Tecumseh Products Co., 378 F.2d 601 (3d Cir.
1967) (applying Pennsylvania 1 aw) ; BTJrbage v. Boiler Engineer ing
& Supply Co. , 433 Pa. 319, 249 A. 2d 563 (1969).
^'^^Hill V. Wilmington Chemical Corp. , 279 Minn. 336, 156
N.W.2d 898, 904 (1968) .
' 'PeYoung v. Kerr Chemicals, Inc . , 21 Cal. App. 3d 1010, 99
Cal. Rptr . 162, 164 (1971); B.K.~Sweeney Co. v. McQuay Norris
Manufacturing Co., 489 P . 2d 356 (Colo. App. 1971); Sorenson v.
Safety-Plate , Inc . , 216 N.W.2d 859, 862-63 (Minn. 1974Tr~^
17 8
Liberty Mutual Insurance Co . v . Will iams Machine _& Tool
Co., 62 111. 2d 77, 338 N.E.2d 857, 860 (111. 1975).
1 79
See , e.g., Wat z v. Zapata Of f-Shore Co . , supra note 28.
12 Uniform Laws Annotated 5 7 (Master Ed . 1975 ) .
based on relative fault," 53
180
181
Annot., "Contribution
A.L.R.3d 184, 191 (1973).
182
12 Uniform Laws Annotated 87 (Master Ed. 1975)
^^^Fehlhaber v. Indian Trails, Inc. , 45 F.R.D 285 (D. Del.
1968); Burks Motors, Inc . v. International Harvester Co . , 250
Ark. 29, 466 S.W.2d 907, rejl- d en . , 250 Ark. 641, 466 S.W.2d 943
(1971); Little v. Miles, 213 Ark. 725, 212 S.W.2d 935 (1948):
Mitchell v. Branch, 45 Hawaii 128, 363 P . 2d 969, 978 (1961);
Degen v. Bayman , 200 N.W.2d 134 (S.D. 1972).
^^^Nelson v. L. & L. Press Corp. , 223 N.W.2d 607 (Wis. 1974);
Pachowitz v . Milwaukee and Suburban Transport Co . , 56 Wis . 2d
383, 202 N.W.2d 268 ( 1 972Tr"Dippel v. Sciano, 37'1/is. 2d 443, 155
N.W.2d 55, 64-65 (1967); Bielski v. Schulze, 16 Wis. 2d 1, 114
N.W.2d 105 (1962). See also Jensvold, "A Modern Approach to Loss
11-69
Allocation Among Tortfeasors in Products Liability Cases," 197^
Ins. L.J. 591, 58 Minn. L. Rev. 723, 7^47 ff. (1974).
185
Packard v. Whitten, 274 A . 2d 169, 180 (Me. 1971).
186,
lyil
187,
'Cyr V. B_^ Offen & Co., 501 F.2d 1145 (1st Cir. 1974)
(applying New Hampshire lawT.
188
189
190
191
ijorklund v. Hantz, 208 N.W.2d 722 (Minn. 1973).
Jensvold, supra note 42.
30 N.Y.2d 143, 331 N.Y.S.2d 382 (1972).
331 N.Y.S.2d at 386-387.
N.Y.C.P.L.R. Sec. 1402 (McKinney's Supp. 1976).
192
S.2
193
Hughes V. Ataka America , Inc . , 48 App. Div 808, 369
N.Y.S.2d 723 (1975) .
Walsh V. Ford Motor Co., 70 Misc. 2d 1031, 335 N.Y.S.2d
1 10 (1972) .
194
Coons V. Washington Mirror Works , Inc . , 344 F. Supp. 653
(S.D.N.Y. 1972) rev'd on other grounds, 477 F.2d 864 (2d Cir.
1973) .
195
196
N.Y. Gen. Obligations Law Sec. 15-108 (McKinney's 1976).
Langford v. Chrysler Motors Corp., 513 F.2d 1121 (2d Cir.
1975) (applying New York law).
197
(1974) .
198
Morales v. Moss, 44 App. Div 2d 687, 355 N.Y.S.2d 456
199
200
(1975) .'
201
Gomes v. Brodhurst , 394 F.2d 465 (3d Cir. 1967).
Hoffman v. Jones, 280 So. 2d 431 (Fla. 1973).
hi ^- Yellow Cab Co., 119 Cal. Rptr. 858, 532 P. 2d 1226
E.B. Wills Co. V. Superior Court, 128 Cal. Rptr. 541, 544
(Cal. App. 1976).
^^^Gertz V. Campbell , 55 111. 2d 84, 302 N.E.2d 40 (1973).
'Zaremski, "Expansion of Third Party Recovery: Common Law
Indemnity, Contribution, Or?", 63 111 . B.J. 684 (1975).
203
mni
204
1976) .
Curtis v. Murphy Elevator Co., 407 F. Supp 940 (D. Tenn .
11-70
205
Ruvolvo V. U.S. Steel Corp., 139 N.J. Super. 578, 354 A. 2d
685 (1976)
206
(1972) .
207
1A. Larson, The Law of Workmen * s Compensation , Sec. 1.10
Larson, supra note 1, Sec. 57.10.
208
209
210
21 1
I_d. Sec. 61.20.
2A. Larson, supra note 1, Sec. 67.21.
Id^. Sec . 71.10.
See Restatement (Second) of Torts Sec. 388 (1965).
^^^See , e.g., McDaniel v. Williams, 23 App. Div . 2d 729, 257
N.Y.S.2d 702 TT9^5 ) .
^^^Lindenberg v. Folson, 138 N.W.2d 573 (N.D. 1965).
214
197 N.W.2d 202 (Iowa 1972).
2 1 5
; See , e.g. , Stief v. J . A. Sexauer Manufac tur ing Co . , 380
F.2d 453 (2d Cir . 1967), cert, denied , 389 U.S. 897 (1967)
(applying New York law).
Martinez v. Dixie Carriers, Inc . , 529 F.2d 457 (5th Cir.
1976) (applying Texas law) ; Littlehale v. E.I, du Pont de Nemours
and Co., 380 F.2d 274 (2d Cir. 1967) (applying New York lawT^
217
Madrid v. Mine Safety Appliance Co., 486 F.2d 856 (10th
Cir. 1973) (applying New Mexico law); Parr is v. M. A. Br uder _&
Sons , Inc., 261 F. Supp. 406 (E.D. Pa. 1966).
218
Sarnoff v. Charles S chad , Inc., 49 Misc. 2d 1059, 269
N.Y.S.2d 22 (1966) and 50 Misc. 2d 418, 270 N.Y.S.2d 763 (1966),
modified , 28 App. Div. 2d 921, 282 N.Y.S.2d 967 (1967), aff'd, 22
N.Y.2d 180, 292 N.Y.S.2d 93, 239 N.E.2d 194 (1968).
219
(19
220
Clark V. Rental Equipment Co. , 300 Minn. 420, 220 N.W.2d
507 (1974).
221
Note, 86 Harv. L. Rev. 923, 930-31, (1973).
Collins V. Ridge Tool Co., 520 F.2d 591 (7th Cir. 1975),
cer t . den ied
222
301 N.Y. 468, 95 N.E.2d 802 (1950)
223
^Micallef
V. Miehle Company, Div ision of Miehle-Goss
Dexter , Inc., 39 N.Y. 2d 376, 384 N.Y.S.2d 115 (1976).
11-71
Compare Rice v. Hyster Co., 540 P . 2d 989 (Ore. 1975), with
Lemberger v. Koehring Co., 63 Wis. 2d 210, 216 N.W.2d 542
(1974) .
^^^Walsh V. Miehle-Goss Dexter , Inc. , 378 F.2d 409 (3d Cir.
1967) (applying Pennsylvania 1 aw) ; Penn . v. Inferno Manufacturing
Co., 199 So. 2d 210 (La. App. 1967) , writ refused , 251 La. 27,
202 So. 2d 649 (1967). But see Reed v. Carlyle & Martin , Inc . ,
214 Va. 592, 202 S.E. 2d 87Tn97Ty, cert. denied , 419 U.S. 859
(1974) .
226
Salladin v. Tellis, 247 S.C. 267, 146 S.E. 2d 875 (1966).
227
IS,
228
2)
229
25
230
Restatement (Second ) of Torts Sec. 402A, explanatory
notes, comment 1 at 354 (1965).
'457 F.2d 1262 (9th Cir. 1972), cert, denied , 409 U.S. 876
(1972) (applying Oregon law).
See , e.g. , Kopera v. Fisher Sc ientif ic Co . , 23 App. Div 2d
851 , 259 N.Y.S.2d 165 (1965) .
Wagner v. Larson, 257 Iowa 1202, 136 N.W.2d 312 (1965).
231
33,
232
(19
233
irown V . Quick Mix Co . , Div ision of Koehring Co . , 75 Wash .
2d 833, 454 P. 2d 205 (1969T7
•Hill V. Clark Equipment Co., 42 Mich. App. 405, 202 N.W.2d
530 (1972) (applying Alabama 1 a wT .
Weaver v. Ralston Motor Hotel , Inc . , 135 Ga . App. 536, 218
S.E. 2d 260 (1975) .
234
1972) .
235
Powell v. E.W. Bliss Co., 346 F. Supp. 819 (W.D. Mich.
Rhoads v. Service Machine Co., 329 F. Supp. 367, 381 (E.D,
Ark. 1971).
236
237
238
Walsh V. Miehle-Goss Dexter , Inc . , supra note 20.
Supra note 27.
202 N.W.2d at 536.
239
■. 1
240
Johnson v. Clark Equipment Co., 547 P • 2d 132, 140-141
(Ore. 1976) .
See Merced v. Auto Park Company, Inc., 533 F.2d 71, 80 (2d
Cir. 1976) (applying New York law); alTd Brown v. Quick Mix Co . ,
Div ision of Koehring Co., supra note 26.
11-72
241
(5'
242,
See Borel v. Fibreboard Paper Products Corp., 493 F.2d
1076 (5th Cir. 1973), cert, denied ," 419 U.S. 869 (1974).
See Fore v. Vermeer Manuf ac tur ing Co . , 7 111. App 3d 346,
287 N.E.2d 526 (1972); and Johnson v. Benjamin Moore & Co . , 396
F. Supp. 362 (W.D. La. 1975).
243
Restatement (Second) of Torts Sec. 388 (1965).
244
Compare Weekes v . Michigan Chrome _& Chemical Co . , 352 F . 2d
603 (6th Cir. 1965) (applying New Jersey and Michigan law); and
Eck V. E. I. du Pont de Nemours and Co., 393 F.2d 197 (7th Cir.
1968) (applying Indiana law) .
See , e.g., West v . Broder ick and Bascom Rope Co . , supra
245
note 9.
?4fS
See , e.g.. Younger v. Dow Corning Corp. , 202 Kan. 674, 451
P. 2d 177 (19'59T7
247
248,
Jasper v. Skyhook Corp. , 89 N.M. 98, 547 P. 2d 1140 (1976).
Bexira v. Havir Manufacturing Corp., 60 N.J. 402, 290 A. 2d
281 (1972T:
249
Rios V. Niagara Machine & Tool Works , 59 111. 2d 79, 319
N.E.2d 232 (1974) .
250
Garrison v. Orangeville Manufacturing Co . , 492 F.2d 346
(6th Cir. 1974) (applying Kentucky law).
251
Restatement (Second ) of Torts , Sec. 402A, explanatory
notes, comment p at 357 ( 1 965 ) .
11-73
TABLE II-1 . --Federal District Courts product
liability cases: total breakdown
FY1974
FY1975
FY1976
Contract actions
Torts to land
Torts to personal property
Personal injury by airline
Personal injury by marine
Personal injury by motor vehicle
Personal injury--all other
278
363
42
46
173
271
301
160
46
140
438
385
1 ,608
2,331
Total product liability cases
1,579
2,886
3,696
TABLE II-2. — Federal District Courts
product liability cases--breakdown by percentage
FY1975
FY1976
Contract actions: percentage of total 9.6
Torts to property: percentage of
total 7.4
Personal injury: percentage of total 82.9
9.8
8.6
81 .6
11-74
TABLE II-3 . --Federal District Courts product liab il ity
cases--comparison to total civ il cases
Total product liability cases
commenced
Total civil cases commenced
Product liability percentage
FY197^
FY1975
FY1976
1 ,579
2,886
3,696
103,530
117,320
130,597
1.5
2.5
2.8
TABLE II-4. — Federal District Courts product
liability cases--per sonal injury torts
FY1975
Percentage
FY1976 change
Total personal injury torts
Product liability total
Percentage
21 ,221
2,393
11.3
21 ,202
3,016
14.2
-0. 1
+26.0
11-75
TABLE II-5. — Connecticut Court of Common Pleas"' --total
prod uct liability breakdown
Category
On the
b \- year
docket
P.L. torts other
than vehicular-
-
1974^
116
1975
126
1976
154
Pend ing^
Assigned for trial
New Entries'
Assigned for t r- i a 1
On the
Non j ur y Jur y docket Non j ur y Jury
1 1
64
41
8
73
62
7
77
69
3
6
18
27
24
29
From the
docket
48
43
98
Pi sposed of 3
Tr led
Non j ur y Jury
6
29
6
26
6
57
Total torts other
than vehicular--
1974 2,778
1975 2,852
1976 3,626
376 1,459
367 1,450
444 1,549
1 ,129
212
630
1,305
223
794
1 ,737
255
663
1 , 189
175
742
1,957
509
790
2,027
328
989
P.L. V ehicul
ar
torts--
1974
48
4
28
13
1
7
18
1
14
1975
44
4
21
19
8
2
13
1
8
1976
56
9
23
14
6
8
27
3
14
Total vehicL
lar
torts--
1974
^
499
399
2
548
1
749
230
1
,030
2
427
279
1
535
1975
^
095
362
2
248
2
685
273
91 0
1
905
197
1
173
1976
5
158
453
2
238
2
835
761
966
3
278
484
1
445
Total civil
cases-
._
1974
13
440
3
,074
4
289
7
609
1
,828
1
,808
7
930
1
,946
2
,467
1975
13
999
3
004
4
094
23
901^^
2
,587
1
,856
1 1
354^
1
,600
2
062
1976
28
092
4
,171
4
435
30
798
5
,887
2
, 161
26
700
3
,516
2
793
The reporting period extends from September 1 to August 31 for each year
■^Because actions entered on the docket are usually not assigned a trial date at the time of
filing, the figure in the left column (on the docket) generally will not equal the sum of the
figures in the middle and the right columns.
■^Because some actions are disposed of by dismissal (following, for example, a settlement
between the parties, or a failure to prosecute the claim), the figure in the left column (from the
docket) generally will not equal the sum of the figures in the middle and right columns.
The circuit court docket was added in here pursuant to a court system reorganization.
11-76
Category
_b^ year
On the
docket
TABLE II-6. — Connecticut Superior Court'' --total
prod uc t liability breakdown
Pend ing^
Assigned for trial
Non j ur y Jury
Mew entr ies*^
Assigned for trial
On the
docket
Non j ur y
From the
Pi sposed of 3
Tried
Jury docket Nonjury Jury
P.L. torts other
than vehicular--
1974^ 226
1975 221
1976 25^^
18
22
14
130
122
143
58
90
96
13
35
61
4
55
57
9
53
55
44
38
33
Total torts other
than vehicular--
1974 4,297
1975 4,315
1976 4,641
353
2,616
1,353
169
851
1 ,280
129
869
336
2,594
1 ,702
177
1 ,039
1 ,379
127
969
359
2,686
1 ,899
186
1,111
1,531
170
998
P.L. V ehicul
ar
tor ts--
1974
60
-
37
25
1975
73
-
40
26
1976
78
2
39
35
Total vehicu
lar
torts--
1974
7
127
399
4
676
2
686
1975
n
1
313
3^*3
4
823
2
894
1976
7
417
302
4
889
3
062
Total civil
cases
._
1974
29
665
4
,235
7
731
23
170
1975
31
960
4
,121
7
932
25
003
1976
32
829
3
,316
8
183
25
793
1
1 1
13
2
15
19
1
20
22
243 1,855 2,511
208 2,048 2,796
165 2,106 2,908
4,975 2,931 20,583
11,977 3,356 24,116
2,830 3,476 24,995
14
18
197 1,740
200 1,964
157 1,977
4,843 2,763
10,718 3,107
2,615 3,176
The reporting period extends from September 1 to August 31 for each year
^Because actions entered on the docket are usually not assigned a trial date at the time of
filing, the figure in the left column (on the docket) generally will not equal the sum of the
figures in the middle and right columns.
^Because some actions are disposed of by dismissal (following, for example, a settlement
between the parties, or a failure to prosecute the claim), the figure in the left column (from the
docket) generally will not equal the sum of the figures in the middle and right columns.
11-77
TABLE II-7. — Key statistical breakdown — total cases
for survey undertaken in Legal Study
Arizona 27
California 95
Illinois 137
New Jersey 37
New York 108
Pennsylvania 129
Texas 100
Wisconsin 22
Total cases 655
TABLE II-8. — Key statistical breakdown--trend : product class
Prod uc t cl ass cases
Chem ical
Containers
Machinery and tools
Recreational
Automobiles
1965-
■70
18
10
28
1 1
5M
1971-76
15
8
63
1 1
138
11-78
TABLE 11-9 . --Key statistical breakdown --time interval
between year of manufacture and year of in j ur y by
product class
Years difference
1
2
3
4
5
6
7
8
9
10 or more
Machinery
Automotive
4
1
1
3
1
2
3
11
51
23
10
9
11
3
4
1
1
1
3
TABLE 11-10. --Key statistical breakdown: forum
1
Yes
No
Unidentified
State of manufacture of
the product 22 73
State of sale 178 8
State in which the
injury occurred 346 31
Home state of the
plaintiff 184 9
Corporate headquarters
of the defendant 65 66
560
469
278
462
523
1
"Forum" refers to the state or federal court selected by
plaintiff(s) for bringing the action.
11-79
TABLE 11-11.-— Key statistical breakdown--trend
total damages awarded
Total damage category
0-7,500
7,500-18,000
18,000-35,000
35,000-50,000
50,000-65,000
65,000-90,000
90,000-150,000
150,000-250,000
250,000+
1965-70
1971-76
Total
10
1 1
21
8
7
15
6
9
15
8
6
14
5
5
10
2
13
15
6
16
22
5
15
20
5
20
25
TABLE 11-12. — Key statistical breakdown — State or
F_
ed
eral
Court
forum
State
St
ate Court
£
ed
eral Court
Arizona
26
1
California
89
6
111 inois
115
22
New Jersey
34
3
New York
90
18
Pennsylvan ia
61
68
Texas
77
23
Wisconsin
17
5
Total
509
146
11-80
TABLE II-I3. — Increase in number of
repor
ted cases:
1965-
-70
V .
1971
-76
Percentage
State
1965-70
1971-
-76
increase
Arizona
12
15
25
California
44
51
16
Illinois
49
88
80
New Jersey
9
28
211
New York
43
65
51
Pennsylvania
38
91
139
Texas
41
59
44
Wisconsin
6
16
167
Total
242
413
71
TABLE 11-14. — Key statistical breakdown — work- and
non
-wor
k-
■ rel
ated
cases
Woi
rk-
Non
-work-
State
rel •
ated
rel
ated
Ind
et
erminable
Arizona
13
13
1
Cal ifornia
33
55
7
Illinois
75
52
10
New Jersey
8
25
4
New York
41
47
20
Pennsylvan ia
60
50
19
Texas
41
46
13
Wi sconsin
12
9
1
Total
283
297
75
11-81
TABLE 11-15. — Key statistical breakdown — disposition
PI
ainti
ff
De
fendant
Procedural
Case
State
prevail
s
pr
evail s
bar
remanded
Arizona
7
10
1
9
California
33
24
3
35
Illinois
41
53
3
40
New Jersey
11
1 1
-
15
New York
29
27
2
50
Pennsylvania
36
34
1
58
Texas
39
23
2
36
Vi sconsin
4
7
0
11
Total
200
189
12
254
TABLE 11-16. — Key statistical breakdown — damages
State
Number of cases
stating damages
Arizona
5
California
26
111 inois
35
New Jersey
6
New York
21
Pennsylvania
32
Texas
29
Wisconsin
3
Average
award
$ 66,200
271 ,558
119,459
415,551*
169,787
136,688
221 ,216
7,050
The figures of damage awards in Arizona, New Jersey, and
Wisconsin suffer from certain circumstances which tend to skew
the data. This can be illustrated by looking at a New Jersey
cas€. The original sample included the case of Huddell v. Levin ,
395 F. Supp. 64 (D. N.J. 1975), where the award was $2,024,700.
Following completion of the sampling, the decision in that case
was reversed on appeal. See Huddell v. Lev in , 537 F.2d 726 (3d
Cir . 1976). If the case is removed from the damages sample, the
average damage award in the remaining five New Jersey cases
becomes $93,721. As noted elsewhere, the data concerning Arizona
and Wisconsin cases are based on very few cases.
11-82
Chapter III
The Impact of
Product Liability on
Selected Industries
CHAPTER III— THE IMPACT OF PRODUCT LIABILITY
ON SELECTED INDUSTRIES
Introduction
The information presented in this chapter came primarily from
two sources--a telephone survey conducted by the industry
contractor among firms in nine product categories selected for
study by the Task Force, and a number of trade associations and
three other private organizations which furnished information
that was collected in surveys of their own members.
Most of the associations providing information to the Task
Force are involved with products that fall within the nine
selected product categories. However, several of the
associations and the three private organi zations--the Risk and
Insurance Management Society, RETORT, Inc., and the National
Federation of Independent Business--are concerned with other
product areas.
As Chapter I indicated, it was not feasible to study all
manufacturing industries, or even all industries that were likely
to have product liability problems; therefore, a selected number
of product categories were chosen which had the potential for
causing serious injury. Also, manufacturers of most of the
products selected approved (on the basis of anecdotal data) to
have product liability insurance problems.
The product categories selected for study were divided into
two groups: (1) products with workplace impact, and (2) products
with consumer impact. The products with workplace impact include
industrial machinery, grinding wheels, metal castings, and
industrial chemicals. Products with consumer impact include
aircraft components, automotive components, medical devices,
pharmaceuticals, and power lawnmowers.
In both the telephone survey and the trade association
surveys an attempt was made to obtain information from small,
medium, and large firms in each product category. In the
telephone survey the 337 respondents were approximately evenly
distributed among the three size categories. They were also
fairly evenly distributed by size in each of the product groups.
III-1
In the trade association surveys the size distribution varied
considerably from one survey to the next. However, all the
surveys together provide a substantial sample of all three size
groups .
Additional sources that were examined in connection with this
study include the various accident and injury reporting systems
of the Federal government and the injury data reported under six
state Worker Compensation systems.
Summary of Findings of the Industry Study's,
Industry Association and Other Surveys
Although the data for this study must still be regarded as
fragmentary, and come from a variety of rather diverse sources,
there is enough consistency among the surveys to permit some
general conclusions to be drawn.
(1) A large majority of manufacturing firms reported carrying
some form of product liability insurance. Among the respondents
to the telephone survey, 86 percent reported carrying product
liability coverage. Large firms had a greater tendency to carry
product liability insurance than small firms: 97 percent versus
7T percent. In the various trade association surveys, the
percentage reporting product liability coverage ranged upwards of
85 percent.
(2) Unavailability of product liability insurance coverage was
not a widespread problem among the firms responding to the
various surveys. Only a few firms reported that insurance was
unavailable at any cost. The problem of high and rapidly rising
insurance costs was much more prevalent.
(3) The cost of product liability insurance has increased
substantially since 1971 with the largest increases having taken
place since 197^. The average percentage increases reported by
all the firms in the telephone survey were 280 percent for the
entire 1971-76 period, and 210 percent for the two-year period
from 1974 to 1976. The increases reported in the trade
association surveys varied widely from one survey to another.
Hov/ever, the median increases among the surveys appear to be on
1 1 1-2
the same order of magnitude as the averages for the telephone
surveys .
( 4 ) The CO s t o f pro djj_cj^_]J, a b i 1 i t y in s u r a n_c,e ...p er_ thousand dollars
of sales is generally much higher for the small firms r^p^rting
in the various surveys than fo_r ^arg^ firms. In many cases the
percentage increases i n„_c Q.S-tjs__.wff r e a1 so— hl&Jiar for smal 1 firms r~~
(5) Despite the large increases in product liability insurance
costs in recent years, most of the surveys found that the average
cost of product liability insurance still represents somewhat
less than one percent of the total cost of sales.
(6) There is an increasing trend toward higher deductibles and
self-retention levels among both large and small firms. However,
where the average limits of liability coverage changed at all
during the last five or six years they generally increased
somewhat .
(7) Both the telephone survey and the trade association surveys
show significant increases in the number of claims and in the
amounts of damages sought in product liability claims filed
during the 1971-76 period. The results of the telephone survey
indicate that the average number of new claims per firm increased
from 4.3 in 1971 to 10.3 in 1972, and to 12.2 in 1975. The
average number for the first nine months of 1976 was 11.4. The
average amount of damages sought in new claims per firm rose from
$476,227 in 1971, to $1,711,039 in 1976. The industry
association surveys show the same trends, although the percentage
increases were considerably larger in several instances. As most
attorneys are aware, plaintiffs frequently request more in
damages than they ultimately receive or expect to receive.
(8) The number of pending claims, and the amounts of damages
sought in pending claims, have been rising more sharply than new
claims. In the telephone survey the average number of pending
claims rose from 3-5 per firm in 1971 to 18.8 in 1976.
Meanwhile, the amount of damages sought in pending claims
increased from $434,075 to $3,526,992 per firm. The trade
association surveys show the same pattern.
/
III-3
(9) The information available from the telephone survey and the
trade association surveys on damage awards and out-of-court
settlements of product liability claims does not provide a
definite indication of trends in recent years. There appears to
be a general upward trend in the amounts of damages paid or
reserved, but there is a great deal of variation from year to
year and from one survey to another. The telephone survey
indicated a sharp rise in the average amount of damages paid per
firm between 1971 and 1972, from $12,100 to $28,800. Since 1972
there has been no significant change in the average amounts paid
per firm.
(10) Analysis of existing Federal accident and injury reporting
systems and the New York State system indicates that there has
been no apparent increase in the frequency of product-related
injuries, at least in the nine product areas selected for study.
Consequently, the increases in product liability suits and claims
in these product areas may be attributed to other causes.
Limitations of the Data
The telephone survey included responses from only 337 firms
out of a population of many thousands of firms in the nine
product areas. While these firms were randomly selected within
each product and size category, the size of the sample is too
small to assure that the information collected is representative
of those product areas or of industry in general. Also, the
product lines selected were ones where product injury risk
appeared to be greater than average.
The trade association data were collected, and in some cases
analyzed, by private organizations which were interested in
assessing the impact of product liability on their own members.
The techniques for collecting and analyzing the data were not
consistent among all of the trade association surveys. In
addition, it was necessary for many of the responding firms to
rely on estimates in order to answer some of the questions in the
surveys .
It should be noted in regard to all product liability surveys
that most product liability insurance is included as part of a
larger package of risk insurance coverage called "Comprehensive
III-4
General Liability" ( CGL) . The product liability portion of the
insurance premium must usually be estimated since it is generally
not stated separately. In such cases estimates of product
liability premium costs were made by the individual firms
responding to the surveys. The result is that although
statements are made about increases in product liability
insurance costs, such statements are usually based on experience
with CGL premiums.
In the telephone survey conducted by the industry contractor,
the 181 firms which were able to estimate the proportion of CGL
premiums accounted for by product liability in 1976 attributed 78
percent of the total premium cost to product liability. The
comparable figure for 1971 was estimated at 62 percent by 118
firms. An additional 43 firms were able to report data for
product liability insurance separately in 1976, while only 12
firms had such data for 1971.
Data on claims and settlements are even more fragmentary than
those for insurance costs. These data also are likely to involve
estimates, or incomplete information in many instances.
Information on the amounts of court judgments or out-of-court
settlements is frequently maintained by a firm's insurance broker
or underwriter and not directly by the firm. In such cases the
information must be obtained from the insurance agents or else
estimated. In many instances this information was not reported
at all.
Consequently, while the Industry Study's telephone survey and
the various trade association surveys provide the only
information available at this time on the trends in product
liability claims, settlements, and insurance costs, it must be
recognized that this information is subject to the limitations
associated with availability of the basic data as well as all the
other limitations discussed in this section.
III-5
THE INDUSTRY STUDY'S SURVEY
Methodology
How the firms were selected and questioned
The industry contractor conducted a telephone survey of
manufacturers in the nine product categories selected by the Task
Force. A total of 337 firms responded to the telephone survey.
The survey was designed to provide information on four product
categories with workplace impact and five product categories with
nonworkplace or consumer impact. It was also designed to provide
information about small, medium, and large firms. The product
categories and firm size categories were as follows:
Products with Workplace Impact
1. Industrial machinery: metal cutting, metal forming,
woodworking, and textile machinery
2. Industrial grinding wheels
3. Ferrous and nonferrous metal castings
4. Industrial chemicals
Products with Consumer Impact
1. Aircraft components
2. Automotive components
3. Medical devices
4. Pharmaceuticals
5. Power lawnmowers
Firm Si ze Categories
'k'\\ Small: firms with sales of less than $2.5 million
III-6
2. Medium: firms with sales between $2.5 million and $100
million a year
3. Large: firms with sales of $100 million and over
The sample of firms for the telephone survey was drawn from a
Dun & Bradstreet list which identifies firms by four-digit
Standard Industrial Classification (SIC). A random sample of
about 20 firms was drawn for each size category in each of the
nine product areas.
Each firm selected in the sample was contacted by telephone
in order to determine whether the firm was indeed engaged in
producing the product in question and whether the firm would be
willing to participate in the survey. The response rate was 68
percent overall, ranging from 53 percent to 80 percent among the
nine product categories.
After the appropriate person to respond to the questions was
identified within each firm, a copy of the questionnaire was
mailed to that person. The questionnaire asked for information
concerning product liability such as trends in premiums and
claims, the impact of product safety programs and practices, and
types of product liability prevention techniques employed or
planned. Information was also requested concerning the
effectiveness of suggestions made by insurance carriers as a
result of loss prevention surveys.
The purpose of mailing the questionnaires to the respondents
was to acquaint them with the types of information being sought
by the Task Force and to guide them in the collection of the
necessary data. Within ten days after the questionnaires were
mailed, the firms were again contacted by telephone in order to
collect the information. The telephone interviewers recorded the
information on forms designed for key punching. In many cases
more than one telephone call was necessary in order to identify
the appropriate person within a firm and to obtain all of the
required information.
As we have indicated, the results of the survey are not
necessarily representative of all manufacturers within any of the
particular product groups or size categories, nor can they be
111-7
Characteristics of Responding Firms
The response patterns by product and sales categories are
shown in Table III-1. Eleven of the 27 sample cells had response
rates greater than 75 percent and 16 equalled or exceeded 65
percent. Only three of the cells had a response rate of less
than 50 percent and one of these is a special case. Only eight
firms with sales of $100 million or more were identified in the
grinding wheels industry, and of these, three responded to the
survey for a response rate of 38 percent. However, the overall
response rate for that product category was 62 percent.
It should be noted that not all respondents were able to
supply data for every question for every year. In the tables
showing the results of the survey, the number of firms responding
to each of the data items is indicated. Because of the variation
in the number of firms responding to each question, care must be
taken in making comparisons between entries in different tables.
Table III-2 shows average sales per firm by product and size
category for 1975. While the average size of sales for firms in
the "medium" firm size category was over $27 million, 28 of the
119 responding firms in that category had sales of less than $5
million, and 54 had less than $10 million. The_refore , it appears
that the distribution of firms within the $2.5 m i 1 1 ion__to___$10 0
million sales category is skewed somewhat toward the smaller end
of the scale.
Although sales data are shown only for 1975 in the table, the
results of the survey indicate that sales increased substantially
for all product and size categories during the 1971 to 1976
period. The estimated average increase for all firms in the
survey during this period is about 70 percent.
III-8
The small- and medium-sized firms in the survey were found to
be heavily concentrated in the nine product areas that were
selected for the study. The small firms indicated that 83
percent of their total sales, on the average, were in the
specified product areas. For the medium-sized firms, the
proportion was 77 percent. As may be expected, the large firms
were more diversified, with an average of 49 percent of their
total sales attributable to the designated product categories.
RESULTS
Insurance Coverage
About 86 percent of the firms in the survey reported that
they carry some form of product liability insurance coverage.
This ratio varied somewhat among the product categories.
However, generally 75 percent to 95 percent of the firms in the
various product categories carry some form of product liability
coverage .
The variation in insurance coverage was somewhat larger
between small and large firms than among product categories.
About 97 percent of the large firms carry product liability
insurance, while only 71 percent of the small firms have such
coverage. About 87 percent of the medium-sized firms reported
product liability insurance coverage. (See Table 1II-3.)
The reasons given for not carrying product liability
insurance are shown in Table I1I-4. Slightly less than 7 percent
of the responding firms indicated that they did not carry product
liability insurance because it was too expensive or unavailable
at any cost. Another 5 percent, mainly small firms, indicated
that they did not need product liability coverage.
Because of the small size of the sample, the results shown in
Table III-M cannot be applied to industry as a whole, or to the
individual product categories. However, the results do provide
an indication that a significant number of firms, particularly
small firms, are going without product liability insurance.
Approximately 64 percent of the responding firms carry both
primary and umbrella product liability insurance. The extent of
III-9
for all products of the responding firms. However, the
percentage increases were on the same order as those reported for
the other categories of product liability insurance coverage,
about 200 percent for the entire 1971-76 period and about 190
percent for the last two years alone.
Rates per thousand dollars of sales for umbrella coverage are
shown in Table 111-8. Significant increases in these insurance
rates occurred only in 1976 for medium and large firms. However,
the rates in all years were much higher for small firms. It is
also apparent that the tendency to carry umbrella insurance is
related to the size of the firms. Small firms are least likely
to carry this type of coverage while a high percentage of the
large firms have umbrella coverage.
Trends in Deductibles and Limits of Liability
The number of firms reporting deductibles, or self-insurance
retention, and the average amounts of deductibles are shown in
Table 111-9. Deductibles increased at irregular intervals
throughout the 1971-76 period, with the largest increases
occurring in 1976. At the end of the period, the average size of
the deductibles was over four times as large as it was at the
beginning of the period. Meanwhile the number of firms reporting
deductibles either for bodily injury, or for combined bodily
injury and property damage, increased from 59 to 116.
Deductibles have consistently been much higher for large
firms than for medium and small firms. The larger firms are also
more likely to have deductibles than the smaller firms.
The overall average limits of liability for bodily injury, or
combined bodily injury and property damage, did not change
substantially during the 1971-76 period. The large firms showed
an average increase about in line with inflation. The medium and
small firms indicated no clear trend in the limits of liability
except for a gradual decrease in the average limit for small
firms in the combined coverage for bodily injury and property
damage. The small firms in the survey consistently reported much
lower limits per occurrence than the larger firms. The average
limit for combined bodily injury and property damage for small
111-12
firms is about one-third as large as the limit for medium-size
firms, and less than one-sixth as large as that for large firms.
A number of firms reported restrictions on insurance coverage
besides the limits of liability. The most frequently reported
restriction was the exclusion of certain products. Thirty-eight
firms, or about 11 percent of the total number of firms in the
survey, reported this restriction. Nine firms reported
restrictions on coverage of legal defense costs and 20 firms
reported other miscellaneous restrictions.
Product Liability Claims Experience
The numbers of firms reporting any claims during the 1971-76
period are shown in Table 111-10. The firms reporting claims in
the nine specified product areas are also shown in the table.
The number of small firms reporting product liability claims
during this period was relatively small. Only 18 firms, or about
18 percent of the small firms reporting on this question, had any
claims. The percentage reporting claims was considerably higher
for the medium and large firms, about 50 percent and 96 percent,
respectively. As might be expected, the number of firms
reporting claims for the nine specified product categories alone
was somewhat smaller.
The average number of claims pending per firm at the end of
each year from 1971 to 1976 is shown in Table 111-11, by product
category. Again, it should be noted, that the data for 1976
cover only about the first nine months. These data show a
substantial rise in the number of pending claims for all products
during the six-year period. For all product categories, the
average number of pending claims increased from 3.5 per firm in
1971 to 18.9 per firm in 1976. For some product categories the
increase was substantially sharper.
Table III-12 shows the average number of new claims filed per
firm, by size category, from 1971 through the first nine months
of 1976. The table shows that there was a sharp rise in claims
for large firms between 1971 and 1972, but no significant change
in the trend of new claims filed for medium and large firms since
111-13
1972. However, the average number of new claims for small firms
rose gradually during this period.
Table 111-13 shows the average number of new claims filed per
firm by product category. These data reflect sharp increases in
new claims from 1971 to 1972 in almost all product categories.
Since 1972 the pattern has been irregular, with increases in some
product areas and no clear trend in others.
The average amounts of damages sought per firm in pending
claims are shown in Table 111-14. The average amount for all
firms reporting increased eightfold between 1971 and 1976. Sharp
increases occurred in all size categories throughout the six-year
period .
The trend in damages sought in new claim.s during the 1971-76
period is less clear than the trend in pending claims. The
average amount sought per firm in new damage claims each year is
shown in Table 111-15. Although there appears to be a general
increase over time in the average dollar amounts sought per firm,
the pattern is quite irregular.
It should be noted that the amount of damages pending at the
end of any particular year should be equal to the amount of
damages pending at the end of the previous year, plus any new
claims filed and minus any claims disposed of during the year.
In several instances the reported data on damages sought do not
appear to be consistent with this basic mathematical logic.
However, it is not possible to determine whether the
inconsistencies result from variations in the firms' reporting
practices from year to year, or from simple reporting error.
Damages Paid
The average amounts of damages paid per firm in court
judgments and out-of-court settlements are shown by size of firm
in Table III-16. There was a sharp jump in the average size of
damages paid between 1971 and 1972, from $12,100 per firm to
$28,800 per firm. Since then there has been no significant
change in the average amounts paid per firm. The absence of any
trend in the average amount of damages paid per firm since 1972
is consistent among all three size categories.
III-14
Product Safety and Product Liability Prevention Programs
The firms responding to the telephone survey were asked a
number of questions about product safety practices and product
liability prevention programs. These questions included such
topics as quality control, design and engineering, instructions
and warnings, and inspections by insurance carriers. The results
of this portion of the survey are described in detail in Chapter
IV.
INDUSTRY ASSOCIATION AND OTHER PRIVATE SURVEYS
Organization of the Surveys
At the beginning of this study of the product liability
problems of American industry, discussions were held with a
number of trade associations and other interested groups. The
purpose of these discussions was to gain a better understanding
of industry's product liability problems, to obtain any
information that these groups had available, and to explore the
feasibility of obtaining additional information through the
cooperation of these groups and their members.
Many of the associations were acutely aware of the product
liability problems of their members. Some had already
established committees or panels to study the issue. Several
associations had also begun to collect data on insurance costs,
claims and suits experience, and remedy preferences of their
members .
As a result of these discussions, a number of trade
associations and other interested groups provided available
information to the Task Force. Some groups conducted surveys of
their members with the objective of obtaining additional
information for their own use and for the consideration of the
Product Liability Task Force.
A total of 21 groups submitted information which was obtained
from surveys and studies of their respective memberships. A list
of participating groups and the types of information provided are
shown in Table III-17. The surveys that were conducted were
designed to address issues of particular interest to the
III-15
mmmm
individual associations. Therefore, the information collected
was not uniform. However, there are enough common elements in
these studies to make the information useful, particularly for
comparison with data from other sources such as the Insurance
Study and the telephone survey conducted for the Task Force by
contractors .
The response rates in the surveys conducted by the trade
associations and other groups were generally quite low, ranging
from 15 to 35 percent in most cases. In many instances the
returned forms were incomplete, indicating either an
unavailability of data or an unwillingness to respond to some
questions. Also, since firms participated voluntarily in these
surveys, it may be that those returning completed questionnaires
had a greater interest in the product liability issue than those
not responding. Such interest could indicate a greater incidence
of product liability claims or larger increases in insurance
premiums among the respondents. The same type of bias may also
be reflected in the telephone survey conducted by the industry
contractor, although to a lesser degree since the response rate
was quite high. On the other hand, some companies with
unfavorable claims experience may have been reluctant to disclose
that fact because of potential unfavorable use in competition or
in litigation.
Characteristics of Respondents
The size characteristics of the respondents to the trade
association surveys are summarized in Table 111-18. While the
distribution of responding firms by size is quite uneven from one
trade association to another, when all associations are
considered, there is a significant representation of all size
categories in the trade association surveys.
The size of the responding firm was not available from all
trade association surveys. However, for those surveys where this
information was available, the total distribution of respondents
by size is approximately as follows: large--440, medium--600,
and small — 1 ,800.
III-16
RESULTS
Insurance Coverage and Availability
About three- fourths of the trade association surveys asked
respondents whether or not they carried product liability
insurance. Those firms without insurance were asked to indicate
the reason for not carrying product liability insurance. The
reasons given for not carrying insurance are shown in Table III-
19.
The percentage of firms not carrying product liability
insurance ranged from 0 to 21 percent among the 15 trade
associations reporting information on this question. The reasons
for not carrying insurance were varied, but the largest number of
firms (56) indicated they were without insurance because they did
not need it. Another 3^ firms indicated they were self-insured.
Of the remaining firms without insurance, 32 stated it was too
expensive, 17 said they could not get insurance and 16 reported
their insurance had been canceled.
It is apparent from Table III-19 that the industries with the
highest percentages of uninsured firms are those predominantly
made up of smaller firms.
Cost of Insurance and Claims in the Selected Industries
Most of the trade association surveys asked detailed
questions about the types of product liability insurance carried,
the cost of product liability insurance, limits of liability, and
deductibles. In most cases this information was requested for
each year from 1971 or 1972 to 1975 or 1976. The annual
information made it possible to examine the trends that were
developing with respect to product liability insurance costs and
insurance coverage.
The surveys also requested detailed information on the
product liability claims experience of the responding firms.
This information included the number of new claims filed each
year and the amount of damages sought in those claims.
Information was also requested on the number of claims and suits
III-17
dropped, the number settled out of court,
damages paid in out-of-court settlements.
and the amount of
Information was also reported on the product liability suits
actually adjudicated. This information included the number of
cases won and lost by the reporting firms and the amounts of
court judgments paid to the plaintiffs.
The information on claims and suits was generally reported
for the same time period as the information on insurance costs
and coverage. Most surveys also included reports on the number
of claims and suits pending at the end of each year and the total
amount of damages sought in the pending suits and claims.
This section summarizes the information collected on product
liability insurance and product liability claims by trade
associations in the product categories designated for study by
the Task Force. The results of the trade association surveys are
grouped according to (1) products with workplace impact and (2)
products with consumer impact. The results of surveys conducted
by trade associations in other product areas and surveys by other
types of organizations are summarized below in the next section.
Products With Workplace Impact
American Textile Machinery Association. --This survey includes
useable responses from 46 firms. Of those firms, 44 reported
carrying product liability insurance. Insurance cost and claims
data were reported for the years 1974 to 1976. Reported
insurance costs by size of firm are shown in Table III-20.
Several important points clearly stand out from these data.
First, the cost of insurance for small firms is very much higher
- than for larger firms. Second, the percentage increases in
insurance costs also were much higher for the small firms than
for the large firms, and they occurred a year sooner. Third, the
' average annual increases in insurance costs for all firms
reporting were very large--568 percent in 1975 and 55 percent in
\ 1976.
There was no significant change in the number of new claims
filed during the 1974-76 period. However, both the number of
III-18
pending claims and the amount of damages sought in pending claims
increased substantially since 197^. The claims experience of the
reporting firms is shown in Table III-21. The data for 1976
represent only part of the year. No court judgments were
reported during this period.
Industrial Heating Equipment Assoc iation.--Fi ft y-three firms
out of 204 firms surveyed responded to this survey. Of these, 49
reported carrying product liability insurance. Insurance cost
and claims data were reported for the years 1971 to 1975.
Reported insurance costs by size of firms are shown in Table III-
22.
Insurance costs for all firms more than doubled during the
five-year period from 1971 to 1975. The largest increase
occurred between 1974 and 1975 when the average rate increased by
54 percent. From 1971 to 1974 the average annual increase was
about 10 percent. Both the rates and the percentage increases
were higher for the small firms than for the large firms.
The limits of liability for primary coverage did not change
significantly during the 1971-75 period. Although there was a
moderate decrease in the average for all firms, the detailed
analysis shows that the average limits increased slightly for
small and medium-sized firms and decreased slightly for large
firms .
The average size of deductibles and the number of firms
reporting deductibles increased somewhat during the five-year
period. In 1971, only one firm reported a deductible of $10,000.
From 1972 to 1974, three firms reported deductibles averaging
$16,700. In 1975, eight firms reported deductibles averaging
$12,600.
Thirty-six of the firms reporting indicated that they had
umbrella coverage, either in addition to primary coverage or
instead of primary coverage. The total cost of umbrella coverage
for the large firms increased about 60 percent from 1971 to 1975.
The average limits of liability increased by about the same
amount. For the medium-sized firms the cost of umbrella
insurance more than doubled while the average limits of liability
increased about 20 percent. For the small firms the average
III-19
reported costs varied greatly from year to year because one firm
in 1971 and another in 1973 reported extremely high costs.
However, if these firms are excluded, average costs increased
steadily from $767 in 1971 to $4,9^6 in 1975. The limits of
liability increased by 30 percent during this period.
Twenty-two of the companies experienced product liability
claims or suits during the 1971-75 period. The number of new
claims filed about doubled during the period. However, the
amount of damages sought in new and pending claims increased very
sharply. The claims experience of reporting firms is shown in
Table III-23.
n
Machinery and All ied Products Institute . --This survey
produced 210 responses across a broad range of industries, with a
primary concentration in the capital goods industries. This was
a very extensive survey which covered a wider range of issues
than most. The main findings in the insurance and claims areas
are summarized below:
• There was a sharp rise in both the number and dollar
amount of product liability claims during the last
decade. For the period from 1970 through 1975, 156
companies reported product liability suits filed against
them in the amount of $828 million as expressed in terms
of plaintiffs' demands. At the end of this period, 161
companies reported that over $113 million was reserved
by insurance carriers for pending claims.
• Almost all respondents carry primary product liability
insurance coverage and excess product liability
coverage. The majority of respondents consider
insurance coverage adequate, but nearly half consider
the cost unreasonable.
• More than 9^ percent of the companies indicated that
their product liability premiums and other costs related
to product liability have increased during the past five
years. The increases ranged up to 4,000 percent, with
58 percent of the companies reporting increases between
100 percent and 1,000 percent.
111-20
• About one-third of the companies were required to accept
large deductibles.
This survey was widely based in terms of the size
distribution of responding firms. Unlike many of the trade
association surveys, which included a predominant number of small
firms, the respondents in this survey were more evenly
distributed across the size spectrum, with a substantial number
of very large firms. The distribution of respondents is shown
below.
Size of firms responding to the survey:
Size of Sales No . of Firms
Under $10 million 25
$10 to $50 million 53
$50 to $100 million 29
$100 to $500 million 59
$500 million to $1 billion 18
$1 billion and over 26
Total 210
Product liability insurance costs as a percentage of sales is
one of the questions addressed in this survey. More than half of
the companies responding to this question indicated that product
liability insurance costs were in the range of 0.1 percent to 0.9
percent of total sales. A summary of the distribution of
insurance costs as a percent of sales is shown below.
Product liability insurance costs as
a percentage of sales:
Percentage Range No. of Firms
Less than .01 percent
.01 percent through .09 percent
.1 percent through .9 percent
1.0 percent through 1.9 percent
2.0 percent through 2.9 percent
3.0 percent and above
Total 177
111-21
19
29
105
17
4
3
This survey included questions about the total costs related
to product liability. Costs in this category include costs of
insurance, uninsured costs of payments to others, and internal
costs not covered by insurance. The percentage increase in the
total amount of such costs during the last five years was
reported by 159 firms. The distribution of the percentage
increases is as follows.
Percentage increase in costs related to
product liability from 1970 to 1975:
Per c entag e Range
0
No . of Firms
Less than 10 percent
10 percent through 24.9 percent
25 percent through 49.9 percent
50 percent through 99.9 percent
100 percent through 199.9 percent
200 percent through 499.9 percent
500 percent through 999-9 percent
1,000 percent through 1,999 percent
2,000 percent through 3,999 percent
4,000 and above
Total
10
1
7
13
16
34
27
32
13
3
3
159
Almost 50 percent of the firms reporting experienced product
liability cost increases of 200 percent or more during the five-
year period. While comparable information is not available for
insurance costs alone, it is apparent from related questions that
the bulk of the costs reported on in the above question consist
of product liability insurance premiums.
The survey asked a number of questions concerning experience
with product liability suits and claims during the past five
years. The responses to those questions are summarized in Table
111-24.
The survey requested information on the total amount and
number of claims paid and reserved for selected years since 1965.
This information is presented below.
111-22
Total claims paid and reserved for selected years:
Year
Number
Amount
No. of Firms
1965
1970
1973
1975
6,6^1
7,084
1 1 , 182
9,865
$11 ,490,971
51 ,414,421
76,250, 157
81 ,236,281
159
192
193
191
The increase in the number and amount of claims between 1965
and 1970 may be partly explained by the increase in the number of
firms reporting in 1970. A number of respondents no longer had
records for 1965. However, the increasing trend in both the
number and amount of claims is unmistakable. In addition, the
figures for 1975 are still incomplete since many claims are not
reported until several years after the accident.
While the number of claims has been rising over the years,
the size of the claims has also been increasing. The average
claim in 1965 was $1,730. This figure increased to $7,258 in
1970, $6,819 in 1973, and $8,234 in 1975. The distribution of
claims paid and reserved during this period is shown below.
Distribution of claims paid and reserved, by size:
Number of Claims Paid and Reserved
Si ze of Claims
Under $1 , 000
$1 ,000 to $10,000
$10,000 to $100,000
$100,000 to $500,000
$500,000 to $1 million
Over $1 million
1965
1970
1973
1975
4,285
4, 181
4,492
2,584
906
1 ,476
1 ,898
1,291
195
530
849
492
19
64
169
90
2
11
15
41
0
4
17
1 1
Again , it
incomplete .
should be noted that the data for 1975 are still
National Machine Tool Builders Association. --This survey
included a total of 60 responses distributed fairly evenly across
all size categories. Detailed data on the cost of product
liability insurance are available only for 1976. The average
I II -23
cost per thousand dollars of sales for all firms was $7.23. This
represents an increase of 89 percent from 1975 and 233 percent
from 1972. The cost distribution by size of firm in 1976 is
shown below.
J Product liability insur ance--cost per thousand
dollars of sales in 1976:
Si ze of Sales
Under $2.5 million
$2.5 to $5.0 million
$5.0 to $7.5 million
$7.5 to $15 million
$15 to $50 million
$50 million and over
Average Cost
No . of Firms
$ 7.51
15
6.48
14
19.16
7
12.30
7
3.48
9
2.68
8
This survey shows the highest rates for product liability
insurance being paid by the small- to medium-sized companies,
with the rates substantially lower for the largest firms.
The 60 responding firms reported a total of 771 product
liability claims since 1970. In 1975 there were 166 claims and
in 1976, up to the time of the survey, there were 67 claims. Out
of the total claims filed, 186 were dropped and 145 were settled
out of court. The average cost of out-of-court settlements was
$18,000 per claim.
The judicial process was completed at the time of reporting
for 58 of the claims filed during the 1970-76 period. Of the 58
suits, 42 were won by the defendants and 16 by the plaintiffs.
The average amount of the court judgments was $256,000.
Twenty-eight of the companies reporting had no product
liability claims pending. The 32 companies with pending claims
reported a total of 436 claims pending.
Railway Progress Institute . --The members of this association
produce virtually all the equipment used by the nation's
railroads. Questionnaires were sent to 86 manufacturing firms.
Thirteen firms responded for a response rate of 15 percent.
However, these firms represent about 30 percent of the industry's
III-24
sales. The size distribution of the responding firms was as
follows: under $50 million in sales — 3 firms; $50 to $100
million — 4 firms; and over $100 million--6 firms.
All 13 of the responding firms reported carrying primary
product liability insurance and umbrella coverage. The cost per
thousand dollars of sales for primary product liability insurance
is shown below.
Product liability insur ance--average annual cost
per thousand dollars of sales:
Year
Average Cost
No. of Firms
1975
1974
1973
1972
1971
1970
$ .90
.74
.75
.73
.77
.49
The cost of product liability insurance increased by 84
percent during the period from 1970 to 1975, or at an average
rate of about 13 percent a year. During the same period the
limits of liability increased somewhat, from $630,000 in 1970 to
$725,000 in 1975. The average amount of deductibles also
increased substantially, from $39,000 in 1970 to $118,000 in
1975, while the number of firms reporting deductibles rose from
five to seven .
The average cost of umbrella coverage also increased
steadily, from $15,300 in 1970 to $26,300 in 1975. The average
limits of liability rose from about $25 million to $34 million
during the same period.
Nine of the responding firms indicated that they had
experienced one or more product liability claims since 1970.
However, only five firms were able to provide any detailed
information on the number of claims filed and the amount of
damages sought. The claims experience for those firms is shown
in Table III-25.
III-25
Woodworking Machinery Manufacturers of America . — A total of
46 companies responded to the survey. Thirty-nine of these firms
reported that they were engaged in manufacturing capital goods
while four firms reported they manufacture consumer goods.
Thirty-eight of the firms also reported that they sell or
distribute capital goods and eight firms distribute consumer
goods. The reporting firms estimated that 95 percent of their
product liability claims arise from manufacturing operations.
Most of the firms reporting in this survey were in the small-
to medium-sized category. Of the 44 firms indicating their size
of sales, 31 had sales of less than $5 million and five firms had
sales between $5 and $10 million. Four companies were in the $10
to $24 million category, three companies in the $25 to $99
million group, and one firm had sales of over $100 million.
Product liability insurance costs were reported both for
primary coverage and for excess coverage. Insurance costs were
reported only on a cost per firm basis rather than cost per
thousand dollars of sales. Average insurance costs per firm are
shown in Table III-26.
The average cost of primary product liability insurance
increased about tenfold between 1971 and 1976. This represents
an average annual rate of increase of nearly 60 percent during
this period. Since 1974 the average cost per firm has increased
by a total of 445 percent.
The cost of excess coverage has increased nearly as much as
the cost of primary coverage. However, the average dollar
amounts for excess coverage are considerably smaller than for
primary coverage and the number of firms reporting excess
coverage is also smaller.
The average limits of liability increased somewhat during the
1971-76 period. Average deductibles also increased during this
period but were still quite low at $2,030 per firm for the five
firms reporting deductibles. Three firms also reported self-
insured retention levels averaging $8,333 in 1976.
111-26
Product liability insurance costs as a percentage of sales
were also reported in this survey. The reported average
percentage rose from 0.3 percent in 1972 to 0.9 percent in 1976.
The number of product liability claims filed and the amount
of damages sought increased substantially during the period from
1971 to 1975. Data were also reported for 1976 but are still
incomplete. The claims experience for reporting firms is shown
below.
Woodworking Machinery Distributors Association. --Thirty-two
firms responded to this survey. Insurance coverage and cost data
were provided for 1971 and 1976. Insurance information was
requested in the survey for general liability coverage and for
umbrella coverage. Thirty firms reported carrying general
liability while two firms carry only umbrella coverage. Average
insurance costs and coverage are shown below.
General liability insur ance--average cost and
limits per firm:
Year Average Cost No . of Firms Average Limits
1976
1971
$3,652
924
30
20
$515,000
297,000
Umbrella coverage--average cost and
limits per firm:
Year Average Cost No . of Firms Average Limits
1976
$1
,886
12
$1
,144
000
1971
384
6
1
J43
000
The average cost of general liability insurance increased
fourfold between 1971 and 1976. This represents an average
annual rate of increase of 32 percent. The average limits of
liability increased about 75 percent during this same period.
The average cost of umbrella coverage, while only about half
as much as general liability coverage per firm, increased at a
faster rate. The average cost rose nearly fivefold between 1971
111-27
and 1975, while the limits of coverage remained essentially
unchanged .
Deductibles for general liability were reported by seven
firms in 1976. The average amount was $3,336. In 1971, one firm
reported a deductible of $1,000.
Product liability claims paid during the period from 1971 to
1976 were reported by six firms. Nine claims were paid for a
total amount of $19^,650, or an average of $21,628 per claim.
There were also nine claims pending in 1976 among six firms.
The total amount of damages sought in pending claims was
$2,035,000, an average of $226,111 per claim.
Grind ing Wheel Institute . — The nature of the responses to
this survey made it impossible to present a complete tabulation
of the results. However, a summary of the results was provided
as follows :
• Respondents represent over 70 percent of the dollar
volume of bonded abrasives manufactured in the U.S.
• The total number of product liability claims was 75
percent greater in 1975 than in 1970. The large- and
medium-sized companies experienced a 58 percent increase
in the number of claims during the 1970-75 period while
small companies had a 350 percent increase.
• The total number of claims that were litigated increased
uniformly in the industry by 375 percent during the
1970-75 period.
• There appears to be no trend in court judgments against
the manufacturers.
• The average cost of product liability coverage increased
by 185 percent from 1970 to 1975. The median increase
was 113 percent. Several companies, primarily small
firms, reported an additional average increase in
premiums of 198 percent from 1975 to 1976. One company
reported a tenfold increase from $8,000 to $80,000.
I 11-2 8
Society of the Plastics Industry . — There were 366 respondents
to this survey out of about 1,100 members of the association.
Responses were received from processors, material suppliers, mold
and tool makers, and machinery manufacturers. The size of the
responding companies covered a wide range from under $5 million
in sales to over $500 million. However, most of the companies
were in the small- to medium-sized category. The distribution of
respondents by size and type of product is shown below.
Size and type of firms responding to the survey:
Type of Company
Size of
sal es
Ma
ter ial
Mold and
Mach
iner
y
(millions)
Processor
Su
ppl ier
Toolmaker
Manu
fact
ur er
Total
Under $5
136
21
26
57
240
$5 to $10
27
4
2
4
37
$10 to $25
20
5
1
15
41
$25 to $50
9
2
1
3
15
$50 to $100
3
5
--
2
10
$100 to $500
4
12
--
1
17
Over $500
1
4
--
1
6
Totals
200
53
30
83
366
About 88 percent of the companies reported that they carry
product liability insurance. Of these, about 84 percent carry
primary and umbrella coverage with the remainder carrying primary
coverage only. The pattern of coverage is similar for all types
of companies.
The information on insurance costs was not tabulated by size
of firm but was tabulated by type of company.
The reported costs for primary product liability insurance
coverage are shown in Table 111-28. Average costs were computed
only for all respondents while median costs were tabulated by
type of firm as well as for all respondents.
The average cost of primary product liability insurance for
all respondents increased by about 224 percent from 1970 to 1976.
This represents an average annual rate of increase of about 22
I II -2 9
percent a year. The largest increases took place during the last
two years. Since 197^ the average cost has increased 178
percent .
The median costs of primary insurance coverage are
substantially lower than the average cost. However, the
percentage increases were about the same. Median costs rose by
230 percent between 1970 and 1976 and by 141 percent since 1974.
Median insurance costs rose more for some types of the
reporting companies than for others. The largest increases for
the entire 1970-76 period were experienced by the machinery
manufacturers. Their median costs rose by 410 percent. The
lowest percentage increase was experienced by processors who had
a 117 percent increase. Material suppliers had a 290 percent
increase and mold and tool makers had a 240 percent increase.
During the last two years the increases ranged from 118 percent
to 190 percent.
There were no significant changes in the limits of liability
for primary coverage during the last six years. The average for
all respondents increased slightly, from $2.2 million in 1970 to
$2.8 million in 1976. The median for all firms increased to
$500,000 in 1976 from $300,000 in all the previous years. The
median figures for the various types of respondents all followed
the same general pattern.
Deductible provisions were reported by 55 companies, or
slightly less than one-fifth of the companies reporting in 1976.
In 1970, 20 companies, or about 17 percent reported deductibles.
The average amount of deductibles fluctuated from year to year.
The average was $64,300 in 1970 and $74,328 in 1976. The median
amount was $5,000 in both years.
Umbrella coverage was reported by 197 firms in 1976. The
number of firms reporting such coverage has increased steadily
from 52 in 1970. The average cost for umbrella coverage rose
from $6,418 in 1970 to $34,078 in 1976. This represents an
increase of 430 percent during the six-year period. The limits
of liability for umbrella coverage decreased slightly from $10.8
million in 1970 to $9.2 million in 1976.
III-30
About 35 percent of the respondents had product liability
claims or suits during the 1970-76 period. However, the
percentage varied considerably by type of company. These
percentages were: 66 percent for material suppliers, 54 percent
for machinery manufacturers, 23 percent for processors, and 10
percent for mold and tool makers.
The claims experience for all respondents is summarized in
Table 111-29.
Cast Metal s Federation . — A total of 195 firms responded out
of 810 firms that were surveyed. Of those responding, 165
reported that they carry product liability insurance and 30
indicated that they have no insurance. Primary and umbrella
coverage are carried by 142 firms while 23 firms have only
primary coverage. Reported insurance costs by size of firms are
shown in Table 111-30.
Insurance costs for all firms increased by 173 percent
between 1971 and 1976. The largest increases took place between
1974 and 1976. The increases in this period alone amounted to
155 percent. The increases in insurance rates in this industry
are fairly uniform across all size groups. The rates are
slightly lower for the larger firms than for the small- to
medium-sized firms. However, the differences are much less
pronounced than in most industries studied.
The limits of liability increased for all size categories
between 1971 and 1976. The average increase for all firms was 48
percent .
Deductibles also increased during the six-year period.
Fifteen firms reported an average deductible of $3,000 in 1971,
while 27 firms reported an average of $6,590 in 1976. This
industry is peculiar in that the small to medium firms reported
higher average deductibles than the large firms. In 1976, eight
small firms reported an average deductible of $9,300, while six
medium firms reported an average of $8,800, and 13 of the larger
firms reported an average of $3,900.
III-31
The limits of liability for umbrella coverage increased for
all size categories between 1971 and 1976. The average increase
for all firms was about 75 percent.
Total product liability costs as a percentage of sales were
reported in this survey. The average percentage increased from
0.13 percent in 1971 to 0.48 percent in 1976. The percentages in
1976 were: 0.33 percent for small firms, 0.38 percent for medium
firms, and .77 percent for the larger firms with sales over $10
mill ion a year .
Thirty-eight companies had product liability claims during
the 1971-75 period. Both the number of new claims and the amount
of damages sought increased sharply during this period. The
claims experience of the reporting firms is summarized in Table
III-31 .
American Die Casting Institute . — The Institute membership is
of two types, regular members who are engaged in producing metal
casting specialties, and affiliate members who deal in related
products. There were 52 respondents to the survey who answered
one or more questions. Eight of these were affiliate members.
The distribution of respondents by size and type is shown below.
Size and type of firms responding to the survey:
Si ze of Sales
Under $5 million
$5 to $50 million
$50 to $100 million
Over $100 million
Members
Affi
lia
tes
Total
27
4
31
16
1
17
1
0
1
0
3
3
Forty-two of the firms reported that they carry product
liability insurance. Cost information was reported on the basis
of total premium costs per firm rather than cost per thousand
dollars of sales. Premium costs for umbrella coverage were also
reported. Average insurance costs per firm are summarized in
Table III-32.
This table primarily reflects the experience of regular
members since it includes data from only one affiliate member.
The average cost of primary product liability insurance increased
III-32
by 97 percent between 1971 and 1975. The increase in 1975 was 23
percent. The average cost of umbrella coverage increased by 56
percent during the five-year period.
No deductibles were reported on product liability insurance
until 1975, when five firms reported deductibles.
The product liability claims experience of the reporting
firms was relatively limited. One member firm reported a suit
for $105,000 in 1971 but did not indicate its disposition. Two
firms reported one claim each in 1972, one of which was dropped
and the other settled out of court. The latter claim was for
$1.5 million and was settled for $47,000. One firm reported a
claim in 197^ for $10,000 but no disposition was indicated. Two
of the affiliates reported that they had a number of claims but
no specific information was provided.
Products With Consumer Impact
The Automotive Parts and Accessories Association , Inc .--Thi s
survey of 1,100 member firms engaged in the manufacture,
distribution and sales of automotive after-market products
includes responses from 105 manufacturers and 14
distributor/retailers.
In the area of insurance costs, all but four respondents
indicated that their insurance premiums had increased by large
increments. Percentage increases over the last year were
reported by 52 firms and averaged about 200 percent. Increases
ranged from 10 percent to 1,000 percent.
The total average increase over the last five years was
reported to be about 3^0 percent for the 36 firms reporting,
indicating that increases on the order of 45 percent annually
were experienced from 1971 to 1975.
General information was also collected
trends of claims and suits as follows:
on the source and
73 of 105 firms reporting indicated that claims
typically arose from purchasers of products. All
distributors indicated this was the case.
III-33
• 28 of 105 firms indicated the claim was typically a
third-party action, while only four cited a Worker
Compensation claim as being typical.
• About 50 percent of the firms indicated an increase in
both the number and size of claims over the last five
years. About 22 percent indicated a claims decrease.
Somewhat less than 30 percent stated that the number and
size of claims had remained the same.
Recreational Vehicle Industry Association . — The information
was collected and subsequently compiled in September 1976. It
dealt with insurance costs, deductibles or self-retention levels,
and certain aspects of legal defense and settlement costs.
No stratification by firm size was attempted; however, a
distinction was made between manufacturers (48 responses) and
suppliers (19 responses). The number of responses concerning
insurance premiums exceeded 27 firms, but the exact number
reporting is not indicated specifically. Reported insurance
costs during the six years from 1971 to 1976 for manufacturers
and suppliers are shown in Table III-33.
A generally stable or slightly increasing pattern is shown
for the period 1971-74. During the 1974-76 period the average
cost of insurance increased by 91 percent for manufacturers and
196 percent for suppliers.
Claim trends were not reported for the entire survey.
However, information on losses, by year, was reported by several
firms. Generally, no trends in losses are apparent. High
average losses were sustained in 1974 as a result of one large
settlement .
General Av iation Manufacturers Assoc iation . — This trade
association represents 35 companies which manufacture over 90
percent of all general aviation aircraft, engines, avionics,
pilot supplies and components. Member firms with general
aviation sales in the $2.5 million to $100 million category
predominate (21 companies). Eight firms have sales of less than
$2.5 million and six are in the over $100 million category.
III-34
All GAMA member companies carry product liability insurance,
normally purchased as a separate package. Most firms purchase
from one of two U.S. insurance pools or from the London market.
It is estimated from industry surveys that the cost of insurance
rose from $3.55 to $21.10 per thousand dollars of general
aviation sales between 1969 and 1973- This represents an
increase of nearly 500 percent, or about 55 percent a year.
Three of the member firms have reported increases for the
period 1971 to 1975 ranging from 360 percent to 1,100 percent.
No information was available on limits of liability.
Some claims information was also presented for the years 1964
through 1973 as follows:
o More new claims are being filed each year and for
greater amounts. In 1973, 253 new claims were filed
compared to 93 claims in 1964.
o Pending claims have also increased many fold, from 3 in
1964 to 224 in 1973- About 50 percent of the claims are
paid out in the third to fifth year after they are
filed.
Heal th Industries Manufacturers Association. --In February
1976, the association sent a questionnaire to 160 member firms
requesting information on each firm's experience with product
liability coverage. Forty-eight responses were received. Only
limited information was obtained concerning premium rates and
claims history. However, it is reported that those member firms
responding experienced a 213 percent average increase in premiums
between 1975 and 1976. Eleven firms also reported increased
deductibles .
American Textile Manufacturers Institute , Inc .--This survey,
conducted and analyzed by the Economic Information Division of
the ATMI, includes responses from 148 textile firms. Product
categories include industrial fabrics, apparel fabrics, home
furnishings, carpeting and hosiery. It is estimated that the
total universe of textile manufacturers is somewhat less than
6,000, with most firms in the less than $5 million sales
category .
III-35
The distribution of firms by size of sales is shown below
together with the percentage of those respondents who carry some
form of product liability insurance, including two companies
which are self-insured.
Percentage of firms with product liability
insurance coverage, by size of sales:
Size of Sales
Percentage of Responding
Firms with Insurance No. of Firms
Under $5 million
$5 to $10 million
$10 to $50 million
$50 to $100 million
Over $100 million
50 percent
14
64 percent
28
84 percent
59
94 percent
18
100 percent
29
148
The above table illustrates that liability protection is more
prevalent among larger companies than among smaller companies.
This trend was also noted in the telephone survey and in a number
of other trade association surveys. Most of the firms which are
not currently insured believe they do not need insurance (21 out
of 27). Six respondents indicated that insurance was too
expensive but none indicated an inability to obtain insurance.
Most respondents were able to report their product liability
insurance coverage and costs separately from their Comprehensive
General Liability coverage. These data indicate that product
liability insurance premiums doubled between 1971 and 1975 for
the average firm. A median increase of 124 percent was reported
for firms below $5 million in sales, while firms with sales above
$100 million experienced a median increase of 67 percent.
Subsequent data collected for 1967 indicate that sharp premium
increases, on the order of an additional 100 percent over 1975
premiums, had occurred or were expected in 1976.
Smaller firms in the survey have increased their limits of
liability during the last five years, but the large firms
responding have not. With the exception of firms with sales
below $5 million, deductibles or self-retention levels have also
increased, particularly for large firms.
III-36
Umbrella or excess layering of insurance was used more
extensively in 1975 than 1971 and for larger amounts. For
example, the median large firm increased the amount of its
umbrella coverage from $5 million to over $22 million. This
trend was not apparent for small firms. Generally, the cost
increases for umbrella coverage experienced over the five-year
period appear to be in direct relation to increases in umbrella
policy coverage.
Information was also collected in this survey on new claims,
pending claims, and settlements. Table 111-3^ shows the number
of companies which have experienced one or more claims since
1970, the number of claims pending in 1970 and 1975, and damages
sought in pending claims for the corresponding 2 years.
This table illustrates that less than 30 percent of the
responding firms have experienced any claims or suits over the
last five years. Half of the firms which did have claims are
firms which have extensive product exposure with sales in excess
of $100 million. The rising trend in pending claims and damages
sought is very apparent. Survey results indicated that while the
number of new claims annually has not increased substantially
since 1970, a large number of the claims and suits are still
pending. Over 90 percent of pending claims are against firms
with sales in excess of $100 million annually.
Damages sought in pending claims have increased sharply since
1970, both on a total basis and a per claim basis. For example,
the average amount sought per claim in 1970 was $204,700. By
1975 the amount had increased to over a million dollars per
claim. The amount of damages sought per claim is still judged to
be underestimated by ATMI since one very large company did not
report its pending claims and a number of other claims do not yet
have information reported on the amount of damages sought.
This survey also provides the following insights with respect
to court actions and settlements for large firms:
• For 12 large firms which were faced with 149 law suits,
only 17 percent of the suits were settled through court
judgments and of these, only half were won by the
III-37
plaintiff. About 32 percent were otherwise disposed
and slightly over half are still pending.
of
• The average cost of out-of-court settlements was about
$11,000. Average judgments for lost court cases
approach $20,000, but for all adjudicated cases (won and
lost) the average is less than $10,000.
• For 21 firms responding, the average amount of damages
sought per claim in new claims filed has been highly
variable: $636,000 in 1971, $874,000 in 1973, $588,000
in 1975 and $725,000 in 1976. No trends are apparent
from this limited sample. Since the average amount of
damages sought in claims and suits pending in 1975 was
in excess of $1 million per claim, but the average
amount per new claim filed during the 1971-75 period was
substantially less than $1 million, it appears that many
of the large claims filed since 1970 have not been
settled .
Cost of Insurance and Claims in Industries and
Organizations Other than the Selected Industries
Cal ifornia Grain and Feed Association . --A sampling of 110
firms engaged in the manufacture and distribution of complete
livestock and poultry feeds and ingredients was conducted by this
association in October-November 1976. Of the 37 firms
responding, about half distribute feed to the consumer-buyers,
nine process a single product and distribute to feed
manufacturers or consumer-buyers, and the remaining nine include
brokerage operations, feed supplement, and special additive, or
seed producers, or distributors. About fifty percent are firms
with sales under $5 million while the other half had sales
between $5 and $50 million.
It is stated by the Association, which analyzed the survey,
that
^ In general it was determined that there is an extremely wide
''^~ variation in coverage and premium costs between firms.
Premiums paid seem to bear little or no correlation to claims
filed or amounts paid out to settle the claims. In some
III-38
instances, those without any losses experienced the greatest
increases in premiums for their product liability coverage,
while some who had experienced substantial losses had
comparatively little or, in one case, no increase.
Examination of the information supporting this conclusion
indicates that while the relationship between premiums and
claims/ settlements is obscure, on the average, small firms seem
to be experiencing fewer claims and smaller increases in premiums
than larger firms.
Eighty-three percent of the small firms surveyed had some
form of product liability insurance. For those firms reporting,
premium increases between 1973 and 1976 ranged between 48 percent
and 500 percent. All large firms were insured. Those reporting
indicated premium increases for the same three-year period
between 55 percent and 1,800 percent, with several reporting
increases in the 400 percent to 1,000 percent range.
Small firms experienced only one claim in the five-year
period ending in 1976. Larger firms reported about 20 claims
since 1971, evenly distributed by year except for 1974 when eight
claims were reported.
Damages sought for new claims have ranged from $100 to $1.4
million dollars. The average claim was $90,000 and the average
settlement was about $4,000. Only two claims are currently
pending with an average amount sought of $85,000 per claim.
Water and Waste Water Equipment Manufacturers Association . —
This association represents manufacturers of equipment and
supplies for the purification, treatment or flow measurement of
water. Usable responses were obtained from 41 firms out of a
survey of 246 member firms.
Thirty-seven of the responding firms either carry some form
of product liability coverage or are self-insured. Insurance
costs and claims were reported for the years 1970 through 1976.
Insurance costs are shown in Table III-35.
III-39
Between 1970 and 197^ insurance costs increased at an average
rate of somewhat less than 20 percent a year. However, between
197^ and 1975 the average rates doubled for firms in the $1 to $5
million sales category and increased by V6^ pgTxrgnt for firms
with sales over $5 milli'on. '"^
The smallest firms reported considerably higher costs for
insurance than the~raFg'er firms during the two years fq^r_L which
adequate data were available. However, the percentage increases
since 1973 were not as large for the smallest firms as for the
others .
Limits of liability for primary coverage appear to have
changed very little for all categories. The survey indicated
that medium and larger firms are assuming much higher self-
retention levels (3 to 6 times as high) than they did in 1971.
Most firms carry some form of excess coverage. For firms in
the $1 to $5 million sales category, premiums for this coverage
have not changed appreciably over the last five years despite the
fact that average limits of liability have increased from $19 to
$28 million. Larger firms have doubled their liability limits
and appear to be paying, on the average, about four times more
for such coverage. Corresponding data for firms under $1 million
indicate reduced limits of liability at equal or higher cost.
These estimates are based on a rather small number of responding
firms .
The responding firms reported 67 product liability claims
during the six-year period. The smallest firms accounted for
only four of these claims while the firms with over $5 million in
sales had over 60 percent of the claims.
The total number of claims increased sharply from 1972 to
1973 and then leveled off. There does not appear to be any
definite trend in the amount of damages sought in new claims.
However, the total amount of damages sought in pending claims has
been rising steadily. The claims experience of reporting firms
is summarized in Table III-36.
During the six-year period, 28 claims or suits were settled
at an average cost of about $4,000.
III-40
Risk and Insurance Management Society ♦ --This survey was
conducted in the fall of 1976. Responses were received from
about 370 firms, which represents somewhat less than 15 percent
of the total membership. Respondents were predominantly large in
size; the median firm had sales of $350 million and 5,000
employees. About 5M percent of the firms are primarily engaged
in manufacturing with the remaining 46 percent more or less
equally distributed among wholesale/distribution, retailing and
serv ices .
Information was collected on estimated costs for primary and
excess insurance coverage, handling costs, deductibles or self-
retention levels, and limits of liability per occurrence.
It was reported that premiums for primary and excess coverage
had increased about 200 percent from 1971 to 1975. It appears
that much of this increase was sustained between 1971 and 1973,
particularly with regard to excess coverage.
The average deductible or self-retention level has also
increased by about 200 percent for both bodily injury and
combined single limit coverage. The 1975 average of the latter
is in the range of $40,000 per firm. The average amount paid out
per firm in settlements during 1975 is also estimated at about
$40,000.
Limits of liability increased about 100 percent during the
five-year period from 1971 to 1975. The net effect is that
insurance coverage for each dollar of expense, including premiums
and self-retention costs, is now about half of what it was in
1971 .
It is estimated by RIMS that two-thirds of the claims and
suits were filed against firms in five industry groups.
Inspection of preliminary data by the industry contractor
indicated that SIC 20, Food and Kindred Products and SIC 30,
Rubber and Plastic Products accounted for 60 percent of all
claims reported in 1975.
The Society also indicated that the number of claims brought
in the year of event increased 36 percent between 1971 and 1975
and that the dollar value of claims increased six percent.
III-41
Frequency of law suits did not increase but there was a 44
percent increase in reserves set aside for suits over the five-
year period .
The number of new claims brought annually was reported in
preliminary data to have increased from about 55 claims per firm
in 1971 to 181 claims per firm in 1975. However, it appears that
a small sample of companies (7) in one industry category
accounted for much of this increase. If these firms are removed
from the sample, the average number of claims per firm in 1975
would be 95. This represents a 72 percent increase since 1971
and a 15 percent increase since 1973.
It appears that the vast majority of claims brought are
dropped or settled in the year in which they are filed. However,
preliminary data indicate that the number of claims pending has
tended to increase about in proportion to the increase in new
claims brought .
RETORT, Inc . — RETORT, Inc., surveyed a number of
manufacturers, distributors, and retailers throughout the United
States. About 85 unprocessed responses were provided to the Task
Fore e .
Questions asked in the survey dealt with the characteristics
of the firm, insurance history, claims experience and insurance
availability. Unfortunately, the quality of the responses was
mixed, making a comprehensive analysis of trend information
d if f icul t .
The information that was obtained concerning insurance costs
during the period from 1973 to 1976 is summarized in Table III-
37. The largest increases took place between 1975 and 1976, with
medium-sized firms having the biggest increases. The 310 percent
increase occurring in 1976 for small firms, following an increase
of 75 percent in the previous year, resulted in a cumulative
increase during the 1973-76 period of about 410 percent. It
should be noted that these averages are significantly influenced
by a few firms that reported increases of 500 percent to 3,000
percent. For example, if one firm reporting a 2,000 percent
increase between 1975 and 1976 is not included in the average,
111-42
the percentage increase for firms in the under $2.5 million
category for 1975-76 is 115 percent rather than 310 percent.
Data reported on claims, damages sought, and settlements
showed no specific patterns other than that the amounts paid in
settlements tend to be substantially lower than damages sought.
It also appears that the number of claims and suits brought in
the 24-month period of 1974-75 was about 35 percent higher than
during the previous 24 months.
National Federation of Independent Business . — The National •/
Federation of Independent Business (NFIB) has over 31,000 small,
independent manufacturer members spread across a broad spectrum
of manufacturing industries. The NFIB product liability survey
was conducted in October 1976. A sample of one out of seven
manufacturer members was selected for inclusion in the survey.
Of the 4,214 questionnaires mailed, 1,296 firms responded for a
response rate of 31 percent. The results of the survey are
6
reported in detail in a report published by the NFIB.
. rms
About 58 percent of the small manufacturing fi:
responding to the survey reported that they carry product
liability insurance. The percentage of firms carrying product
liability insurance increases with the size of firms. Among the
smallest firms, those with gross receipts of less than $50,000,
only 28 percent reported carrying product liability insurance.
This percentage increases progressively, to 78 percent for firms
with gross receipts of $1 million and over.
The
follows
major findings of the NFIB survey are summarized as
Approximately 9 percent of the firms reported that they
could not afford to carry product liability insurance.
Another 17 percent reported that they could not afford
the desired limits of insurance. However, less than 1
percent reported that they could not obtain insurance at
any price. About 3 percent of the firms reported that
they have discontinued carrying product liability
insurance because they can no longer afford it.
III-43
Product liability insurance rates are rising rapidly.
About 40 percent of the firms reporting expect their
next premium increases to be 50 percent or more. About
half of those firms expect the increases to be over 100
percent .
The number of product liability claims filed against
responding firms in 1976 is estimated to be
approximately double the number filed in 1972. The
number of reported claims has been rising steadily
throughout the 1972-76 period. The amount of damages
paid in claims has also been rising progressively. As
of the first nine months of 1976, the amount paid out
was over 2.5 times as high as for the full year of 1972.
A number of firms are canceling or postponing the
introduction of new products, or dropping old products,
because of the cost of product liability insurance, an
inability to obtain product liability insurance, or
because of the threat of product liability suits. About
one in eight of the responding firms reported that a new
product was not introduced because of product liability
considerations. About one firm in twenty reported
dropping a product for the same reason.
WHAT PRIOR GOVERNMENT-COLLECTED DATA SHOW
Introduction
There are no comprehensive accident and injury reporting
systems either at the Federal or at the state government level.
However, a number of special purpose reporting systems have been
developed at both the Federal and state levels in conjunction
with the administration of health and safety regulations and
indemnity programs such as state Worker Compensation.
The industry contractor's work effort included an examination
of a number of state and Federal accident and injury reporting
systems. Useful data were acquired from several systems
concerning product-related accidents in both the workplace and
consumer areas. In several cases, sufficient data were available
III-44
to examine trends in accidents and injuries over a period of
years .
Data on workplace injuries were obtained from Worker
Compensation systems in six states. The Occupational Safety and
Health Administration (OSHA) of the U. S. Department of Labor was
able to furnish this information under a supplementary studies
program being carried out by the U. S. Bureau of Labor
Statistics. Injury data based on employers' first reports were
obtained for 197^ for California, Maryland, Texas, Washington,
and Wisconsin. Trend data based on closed compensation cases
were obtained from New York for the period from 1966 to 1972.
Data on consumer product injuries were obtained from two
Federal agencies. One source was the Consumer Product Safety
Commission (CPSC) which receives reports filed by selected
hospital emergency rooms with its National Electronic Injury
Surveillance System (NEISS). The data from this source were
available for the period from 1973 to 1975. Data on general
aviation accidents were obtained from unpublished tabulations of
aircraft accident reports compiled by the Federal Aviation
Administration (FAA) from 196^ to 1975.
Workplace Injuries
Data on workplace injuries were derived from employers' first
reports of injuries filed with state Worker Compensation boards
and commissions and from closed compensation cases. The
employers' first reports are the immediate reports of accidents
and injuries filed at the time of occurrence, while closed
compensation cases are the claims that have been settled by
insurance carriers or adjudicated by state accident boards or
commissions. The distinction is significant in that the
preponderance of industrial injuries may not result in time lost
from work or in claims being filed. However, both sources
provide information on workplace injuries, the product or agent
involved, the nature of the injury, and related information.
First report data for 197^ from the States of California,
Maryland, Texas, Washington, and Wisconsin were analyzed to
determine the incidence of accidents related to the products
selected for study by the Task Force. The results of the
III-45
analysis indicate that these products accounted for 14.3 percent
of the accidents in California, 9.9 percent in Wisconsin, 9.5
percent in Washington, 9.4 percent in Maryland, and 3.7 percent
in Texas. Among the selected products, the two most frequently
associated with workplace accidents, by a very substantial
margin, were motor vehicles and cutting and forming tools.
Closed compensation cases from the State of New York were
analyzed for the period from 1966 to 1972. About one-fifth of
the cases during this period involved the products designated for
study. There was no significant change in that proportion over
the period. Motor vehicles and industrial machinery were again
the products most frequently associated with accidents among the
product groups selected for study. However, the percentage for
industrial machinery decreased somewhat from 4.96 percent in
1966-70 to 3.35 percent in 1972. The percentage for motor
vehicles remained unchanged at about 9.2 percent. The total
number of industrial accidents reported in the New York closed
claims data increased by about 2.5 percent between 1966-70 and
1972.
The use of closed compensation claims data enabled the
contractor to derive estimates of the approximate severity of the
injuries, which is related to the number of weeks of benefits
paid and the amount of benefits paid. The most severe injuries
were found to be associated with aircraft accidents, followed by
chemicals, ladders, and automobiles. However, there was no
indication that there was any change in the severity or in the
frequency of accidents associated with these products during the
1966-72 period. The same patterns were found for all product-
related accidents reported in the New York closed claims data.
These limited available data on workplace accidents confirm
that the products selected for study by the Task Force were
frequently involved in workplace injuries. Differences in the
percentages of total industrial injuries associated with these
products in the various states studied can probably be attributed
to the differences in industrial composition among the states,
and consequently, the variation in product exposure.
Data for analyzing the trends in product-related accidents
were unfortunately available only for New York State. However,
III-46
the analysis of over 100,000 closed claims annually for the
seven-year period from 1966 to 1972 indicates that the frequency
and severity of workplace injuries related to these products have
remained relatively constant. The same also appears to be true
for the individual product groups that were analyzed.
The results of the analyses of workplace injuries as reported
to the state Worker Compensation systems are presented in detail
in Chapter III of the Industry Study.
Consumer Product Injuries
Data from the Consumer Product Safety Commission were
analyzed to develop a profile of consumer product-related
injuries and to determine whether there were any trends that may
be relevant to the product liability problem. Data were
available from the National Electronic Injury Surveillance System
(NEISS) for the years of 1973, 1974, and 1975. The data were
reported by 119 selected hospital emergency rooms. The agent of
injury was reported, as well as the severity of the injury, on a
scale of 0 to 8.
Injuries were reported for about 950 different product codes
in 1974 and 1975. This was an increase from 725 products in 1973
when the program was started.
A severity index has been devised for NEISS which assigns
progressively higher, judgmental weights to nine different
categories of injuries, ranging in value from 0 to 10. By
multiplying the number of injuries reported times the average
severity per injury, another measure of product risk is derived
called the Frequency/Severity Index (FSI).
A small number of products caused a majority of the injuries
reported in each of the three years. About 25 consumer products
accounted for approximately three-fifths of the injuries reported
by NEISS. The number of injuries reported for all products
totaled 315,371 in 1973, 305,508 in 1974, and 386,739 in 1975.
In terms of frequency, stairs and bicycles were the most
hazardous products, accounting for 6.9 percent and 5.6 percent of
the injuries reported in 1975. Based on the Frequency/Severity
III-47
Index, these two products also ranked number one and two as the
most hazardous products.
Among the consumer products selected for this study, motor
vehicles, drugs, and lawnmowers ranked among the top 15 most
hazardous products based on the FSI.
Aviation accidents are not reported to the CPSC information
system since they come under the jurisdiction of the Federal
Aviation Administration. The FAA collects and analyzes data
annually on the incidence, causes, and characteristics of general
aviation accidents.
A time series of general aviation accidents was prepared by
the industry contractor from FAA data for the period from 1965 to
1976 for the purpose of analyzing the trends in accidents.
General aviation accidents were divided into three broad
categories: product-related, human-related, and other. Injuries
were classified according to severity as fatal, serious, minor,
and none/unknown.
Analysis of the FAA data revealed that while the total number
of accidents almost doubled between 1965 and 1974, the number of
accidents per thousand hours of flying time remained essentially
constant throughout this time period. Product-related accidents
accounted for less than half of all minor injuries reported,
about one-fourth of all serious injuries, and less than one-third
of all fatalities. It was also found that the proportion of
product-related injuries remained constant during the period from
1965 to 1974.
The results of the analyses of consumer product-related
injuries are discussed in detail in Chapter III of the Industry
Study.
1 1 1 -4 8
NOTES TO CHAPTER III
See Interagency Task Force on Product Liability, Product
Liability: Industry Study , Volume II, Appendix B (Washington:
U.S. Department of Commerce, May 1977).
2
In this chapter the term "umbrella" insurance is used to
represent all forms of excess liability insurance coverage.
Interagency Task Force on Product Liability, Product
Liabil ity : Industry Study , Volume I (Washington: U.S.
Department of Commerce, May 1977), p. IV-39.
4
All of the data in this section are from the report
published by the Machinery and Allied Products Institute
presenting the results of their survey--Machinery and Allied
Products Institute, Products Liabil ity: A MAPI Survey
(Washington: Machinery and Allied Products Institute, August
1976) .
5
This average does not include one firm reporting a 20,000
percent increase.
National Federation of Independent Business, NFIB Survey
Report on Product Liability (Washington: National Federation of
Independent Business, January 1977).
111-^9
Table III- 1 . --Number of Firms in the Sample , Number of Responses and
Response Rates , by Product and Sales Categories
Product Category
Industrial products
Less than $2.5 million
Number Number Percent
Contacted Responses Response
$2.5 to $100 million
Number Number Percent
Contacted Responses Response
Industrial machinery
Metal castings
Grinding wheels
Industrial chemicals
18
14
78
18
11
61
16
8
50
17
12
71
20
11
55
20
13
65
18
15
83
21
18
86
Consumer products
Power mowers
Automotive components
Pharmaceutical s
Medical devices
Aircraft components
All product cate-
gories
18
15
83
20
9
15
22
12
55
20
13
65
18
9
50
167
103
62
18
14
78
21
14
67
19
12
63
19
13
68
18
9
50
174
1 19
68
Product Category
Industrial products
Industrial machinery
Metal castings
Grinding wheels
Industrial chemicals
$100 million and over
Number Number Percent
Contacted Responses Response
20
18
90
18
14
78
8
3
38
17
14
82
All Firms
Number Number Percent
Contacted Responses Response
58
43
74
56
38
68
42
26
62
55
44
80
Consumer products
Power mowers
19
8
42
Automotive components
19
15
79
Pharmaceuticals
19
16
84
Medical devices
17
15
88
Aircraft components
21
12
57
All product cate-
gories
158
115
73
55
37
67
60
38
63
60
40
67
56
41
73
57
30
53
499
337
68
Source: Product Liability Industry Telephone Survey, Gordon Associates Inc., December
1976.
III-50
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Tnble I II-1 1 . --Avernp.e Uumhcr of Pending Claims,
by Product CatPK'^ry--1971-76
Product Category
1971
Number of
Claims/Firm
Number
1
Year
1972
Number of
1
1973
Number of
Claims/Firm Numter Claims/Firm Number
Industrial products
Industrial machinery
Metal castings
Grinding wheels
Industrial chemicals
1.9
36
2.2
36
6.00
35
1.9
35
2.9
35
3.9
35
3.6
25
3.9
25
'i.l,
25
O.lJ
32
1.7
3«
3.2
36
Consumer products
Power mowers
Automotive components
Pharmaceutical s
Medical devices
Aircraft components
6.2
33
9.1
32
10.2
33
1.8
26
3.3
27
4.0
27
10. 1
32
9.1
32
10. 1
32
1.9
33
3.7
35
6.1
36
3.5
21
6.3
23
7.7
23
All product cate-
gor ies
3.5
273
li.S
280
6.2
282
Product Category
Industrial products
197'4
Number of
Claims/Firm
Number
Year
1975
Number of
Claims/Firm
Nurber
1976
Number of
Claims/Firm Number
1
Industrial machinery
Metal castings
Grinding wheels
Industrial chemicals
7. 1
36
10. 1
38
18.1
39
4.9
35
6.5
35
8.6
35
6.6
25
7.3
25
11.4
25
4.6
37
10.2
38
8.5
36
Consumer products
Power mowers
16.9
34
19.3
S"*
48. 1
35
Automotive components
32.2
29
39.0
29
36.9
28
Pharmsoeut ical s
11.3
32
12.3
32
13.7
33
Medical devices
12.5
38
12.7
39
12.9
39
Aircraft components
8.3
23
11.0
23
11.3
24
All product cate-
gor ies
11.4
289
14.0
293
18.9
294
1
Number indicates the number of firms responding.
Source: Product Liability Industry Telephone Survey, Gordon Associates Inc., December
1976.
III-60
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III-65
Table I II-1 7 . --Summary of Trade
Partlc Ipat ing In th<
Trade Associations
Cast Metals Federation
Industrial Heating Equip.
Assoc .
American Die Casting Inst.
Water i Waste Water Equip.
Mfrs. Assoc.
Woodworking Machinery Mfrs.
of America
Woodworking Machinery Distrib.
Assoc .
Railway Progress Institute
Society of the Plastics Ind.
Machinery & Allied Products
Institute
Automotive Parts & Accesso-
ries Assoc.
Recreation Vehicle Industry
Assoc .
Nat'l. Machine Tool Builders
Assoc .
American Textile Machinery
Assoc .
American Textile Mfrs. Inst.
Calif. Grain & Feed Assoc.
Health Industries Mfrs. Assoc.
General Aviation Mfrs. Assoc.
Grinding Wheel Institute
Assoc i.it ions and Cthcr Organ l^atlons
Product L^a^^ ij^i_t\_ Study
Number cf
Completed
Survey
Responses Information Provided
250 Individual records
53 Individual records
52 Individual records
11 Individual records
46 Summary statistics i text
32 Data array
13 Individual records
366 Statistical tables
210 Summary statistics i text
110 Summary statistics i text
67 Summary statistics, tables
60 Summary statistics
16 Summary statistics
IfS !^ata array
37 Summary statistics, text,
quotations
48 Summary text
35 Summary text
Summary text
Other Participating Or?an i za tions
RETORT, Inc. 87
Risk and Insurance Management
Society 371
National Federation of
Independent Business
1 ,296
Individual records
;.ata array, r.agneti:; tape
r ecc rd s
"ummnry .'Jtati sties 'i text
Source: Respective Tr.Tdo A.isoc iat ions and Other OrF.an I za t lons--
data cornpllfd by Gord</ri Asooc la to i , Inc., an': U. S. De par tmi.-T t of
Commerce, December 19Y6.
III-66
T.iblf; r r I - 1_8 . --;i_tj/r- Ch.ir.K:' '-r i st i-^.'i o.' yor.por.'lnnta to Utt
Tri'd' As .'•.or. ; .it i or ^',i;i i^:/::
Prof[iJCt CstoKory
A . toriot : ve Conponen t.s :
L.'.rp.e llij'f^ 'Vdlun Lou Mo'liun
Over :inO rr.ii. ($':>0-100 mi:. 'JS-'jO mil.
^nnu.j) .",Tle.-) .^nnu-il .Snle?.) Annusl .'5alec)
r^mnll
(Uiu;nr $5 nil.
Annual Sales)
Automctive Parts and
Accc:i.-,or i.-?3 As.^oc.
Uol Available
Recreation Vehicle
I n d . 3 1 r y A s ,'; o c .
Ai rcraf ''- Components:
Ceneril Aviation Mfrs.
Assoc .
Industr ial Ha o_h j_ner_y :
Woodworking Machinery
Distributors Assoc.
''.C. Available
6(;7%)
21 (60J)
8(23?)
i,'c t Available
Woodworking Machinery
Mfrs. of America
Ameri:an Textile
Macninery Assoc.
U2l)
i'J%)
12(27%)
12(26%)
31(70%)
31 (67%)
Industrial Heating
Equipment Assoc.
Raili.^y Progress Inst.
National Machine Tool
Builders Assoc.
1(2%)
6(146%)
8(31%)
2(4%)
14(31%)
19(36%)
3(23%)
23(38?)
31(58%)
29(18%)
Vetal Castings:
American Die Casting
Institute
Merbers
Af f il iates
Survey-Overal 1
Cast Metals Federation
:-r ind ir. J Wheels:
Grinding Wheels Inst.
Indust.'- i.Tl Chemicals:
3(-7%)
3 (6 : )
9(3%)
1 (2%)
16(36%)
--
1(13%)
1 :?%)
17(33%)
6(2%)
106(43%)
Not Available
27(61%)
4(50%)
31(6C%)
128(51%)
Soci-.^ty of the Plastics
Tn.iustry
Processors 5(-%)
Materials .Suppliers 16(30%)
Ot);or (tool, molding
m.ichinos) T ' - ^'-■'_
Su;• v ey-Ov eral 1 ?}.{:%)
U 1% )
?(9%)
___:(_? %_2
1 0 r^ % )
■36(287)
11 (2 1t)
- "^ '•2?- 'J
.V(^5%i'
1 35(68%)
2 1(40%)
__8 3J 72%1_
2y9(65%)
III-67
Product Category
Med ical Dev ices:
Health Industry Mfrs.
Assoc .
Other:
California Grain and
Feed Assoc.
Water and Waste Water
Equipment Mfrs. Assoc.
American Textile Mfrs.
Institute
Diversi fled Surveys :
Machinery and Allied
Products Institute
Risk and Insurance
Management Society
RETORT, Inc.
National Federation of
Independent Business
Large
(Over $100 rail
Annual Sales)
High Medium
($50-100 mil .
Annual Sal es)
Low Medium
($5-50 mil .
Annual Sales)
Small
(Lnder $5 mil.
Annual Sales)
Not available but industry dominated numerically by small ^usiness
29(20%)
103(H9X)
18(12%)
29(14%)
12(60%)
16(39%)
87(59%)
53(25%)
263(82%) 27(8%) 32(10%)
Not available
Not available but all presumed to be small.
8;ic%)
25(61%)
TJig?)
25:12%)^
Note: Percentage totals may not add due to rounding
^Represents firms with sales of $10 to $50 million.
■^Represents firms with sales under $10 million.
SOURCE: Respective Tride Associations and other Organ 1 zations--date compiled by
Gordon Associates, Inc., and U. S. Department of Commerce, Decomter 1976.
III-67a
TaM_p I_I_I_-_I_9.— Rpjirion-^ ^l.v^f^. for Hot Crirj y^lji c Product LlablUt;,
Insurnnoo in Tr .'ido "A^jtoo i a 1 1 on Surveys
Trade Association and
Prodomin.-int Clze of
Firms Reporting
Smal 1 :
Health Industry
Manufacturers Assoc.
Water ^ Waste-Water
Equip. Mfrs.
American Die-Casting
Inst i tute
Cast Metals Federation
Society of the
Plast ics Industry
Woodworking Machinery
Manufacturers
American Textile
Machinery Assoc.
Industrial Heating
Equip. Assoc.
Sol f-
Roasonr. For Not Ca r r y 1 n p. Product Lt abil ity
\itr.~of '
Too Don't Can't Mot Firms not
Canceled Given Insured
Insured Expensive Need
3^ 3
3 1 1
1 1
9
16
12
Get
7^
10
7
10
36
11
3
2
I of
Assoc latlon
Sample
21
17
19
18
11
7
H
Med ium-Small :
Ar.erican Textile
Mfrs. Institute
California Grain &
Feed Assoc .
21
27
3
18
Large:
Machinery & Allied
Products Institute
Railvjay Progress
Institute
Risk & Insurance
Mngmt. Society
Unknown:
Automotive Parts 4
Accessories Assoc.
Recreation Vehicle
Industry Assoc.
TOTALS
3
3>i
32
56
17
16
9
3
163
Includes 1 firms with very high deductible level s--exceed ing loss expectation.
Figure from text; not statistically supported.
Mentioned but no figures provided.
New firms having trouble finding coverage.
Source: Respective Trade Associations--data compiled by Gordon Associates Inc., and U.S.
Department of Commerce, December 1976.
III-68
Table III-20 . — Product Liabil ity Insurance- -Aver age Annual
Cost Per Thousand Dollars of Sales-- (ATMA )
Year
Average Cost
No . of Firms
Sales under $2 million
1976
1975
1974
$1 1 .62
9.84
.83
12
13
12
Sales from $2 to $10 million
1976
1975
1974
$5.79
.60
.52
1 1
9
9
Sales over $10 million
1976
1975
1974
$ 1.11
.78
.58
8
10
10
All firms
1976
1975
1974
$6.84
4.41
.66
31
32
31
III-69
Table III-21 , — Claims Experience of Reporting Firms-- (ATM A ;
New claims filed
Year
New Claims
Damages Sought
No.
of Firms
1976
14
$3,443,236
6
1975
31
8,776, 120
10
1974
22
3,532,532
6
Claims settled out of court
Year
No. of Claims
Amount Paid
1976
1975
1974
$ 4,925
275,272
32,440
Claims pending at end of year
Year
Number
Damages Sought
No. of Firms
1976
1975
1974
18
16
12
$5,682,347
6,327,000
2,470,060
III-70
Table III-22 , — Product Liabil ity Insurance- -Aver age Annual Cost
Per Thousand Dollars of Sales .-- (IHEA )
Year
Average Cost
No. of Firms
Sales under $5 million
1975
1974
1973
1972
1971
$1 .88
1 . 14
.86
*.69
.66
19
14
12
7
7
Sales of $5 to $10 million
1975
1974
1973
1972
1971
$ .79
.64
.62
.64
.67
3
2
2
2
2
Sales over $10 million
1975
1974
1973
1972
1971
$1.43
1 .00
1 .00
.86
1 .21
7
6
5
4
3
All firms
1975
1974
1973
1972
1971
$1 .95
1.27
1 .06
*1 .01
.95
29
22
19
13
12
^Excludes one firm that reported $8.72 per thousand.
III-71
Table III-23 . — Claims Experience of Reporting Firms — (IHEA)
New claims filed
Year
New
Claims
Damages Sought
No . of Firms
1975
33
$53,637,000
14
1974
17
6,857,000
10
1973
15
1 ,826,000
9
1972
8
1 ,417,000
7
1971
15
586,000
8
Claims settled out of court
Year
No. of Claims
Amount Paid
1975
1974
1973
1972
1971
$391 ,000
67,000
91 ,000
25,000
78,800
Court judgments
Year
Sui
ts
Won
Sui
ts
Lost
J_
udgments Paid
1975
0
1
$65,000
1974
0
1
10, 000
1973
1
0
-0-
1972
0
0
-0-
1971
0
0
-0-
Claims/suits pending at end of year
Year
Number
Damages Sought
No . of Firms
1975
57
$79,600,200
18
1974
32
9,582,500
13
1973
22
4,935,500
10
1972
1 1
4,733,000
7
1971
5
3,588,000
4
III-72
Table III-24 . --Claims Experience Pur ing the Period
From 1970 to 1975. — (MAPI)
Item
Number
Amount
No . of Firms
(1) Total claims presented 16,785 $366,905,041
(2) Claims paid without
court action
(3) Claims rejected
(4) Claims pending
4,396
(7) Suits settled out of
court
(8) Judgments for
defendant
(9) Suits pending
8,675,282
2,858 35,414,537
1
3,272 176,663,709
(5) Suits filed on claims 11,768 828,465,205'
(6) Judgments for claimants 212 22,059,978
1,218 115,794,838
^^^ 375,124,013-
3,203 113,841,101
176
175
138
159
156
152
156
133
161
1
Many respondents reported the number of claims rejected
without indicating amounts; therefore this amount represents only
892 of the rejected claims.
2
About 34 percent of this amount is attributed to one
company .
3
Many respondents reported the number of judgments won
without reporting the amounts involved; therefore this amount
represents only 197 judgments.
III-73
Table III-25 . — Claims Experience of Reporting Firms . --(RPI )
New claims filed
Year New Claims
Damages Sought
Claims/suits pending at end of year
Year Number Damages Sought
No. of Firms
1975
20
$96,000,000
5
1974
12
88,000,000
5
1973
6
28,000,000
5
1972
9
6,000,000
5
1971
3
5,000,000
5
No . of Firms
1975
21
$150,000,000
5
1974
18
59,000,000
5
1973
13
35,000,000
5
1972
1 1
1 1 ,000,000
5
1971
5
6,000,000
5
Table III-26. — Insurance Cost Per Firm — (WMMA)
Year
Average Cost
No . of Firms
Primary product liability insurance
1976
1975
1974
1973
1972
1971
Excess coverage
1976
1975
1974
1973
1972
1971
$30,089
12,607
5,525
4,502
5,338
3,084
$ 7,474
7,434
3,078
2,665
698
815
26
29
25
20
20
17
12
15
11
7
6
5
III-74
Table III-27 . --Claims Experience of Reporting Firms- (WMMA)
New claims filed
Year
New Claims
Damages Sought
No. of Firms
*1976
37
$ 9,360,000
16
1975
54
21,863,046
17
1974
48
14,273,000
15
1973
20
6,758,700
9
1972
32
6,791,750
14
1971
19
2,919,107
1 1
Estimated suits filed (dollar amount represents amount reserved)
Year
*1976
1975
1974
1973
1972
1971
N
umber
9
15
20
6
9
4
Amount
$1 ,534,000
1 , 193,000
2,715,050
183,500
881 ,667
1,395,757
Claims pending at end of year
Year
*1976
1975
1974
1973
1972
1971
N
umber
27
30
17
10
1 1
3
Damages Sought
$ 5,893,500
10,438,000
6,516,750
3,235,250
3,086,750
1 , 195,000
*Data for 1976 are incomplete.
III-75
Table III-28. — Primary Product Liability Insurance--Average and
Median Annual
Costs
Per Thousand
Dollars of
Sales--(SPI)
Year
Averaj
le Cost
Median Cost
No. of Firms
All respondents
1976
$2
.20
$ .99
168
1975
1
.35
.50
163
1974
.79
.41
133
1973
.62
.29
104
1972
.70
.38
88
1971
.79
.39
59
1970
.68
.30
47
Processors
1976
.65
100
1975
.38
98
1974
.29
78
1973
.27
63
1972
.30
48
1971
.29
33
1970
.30
28
Material suppliers
1976
1.13
14
1975
.49
13
1974
.39
9
1973
.29
7
1972
.39
9
1971
.39
7
1970
.29
5
Mold and tool mak
ers
1976
.98
14
1975
.39
11
1974
.45
9
1973
.29
5
1972
.29
5
1971
.29
3
1970
.29
3
Machinery manufac
turer s
1976
2.50
40
1975
1 .22
41
1974
.98
37
1973
.79
29
1972
.90
26
1971
.95
16
1970
.49
11
III-76
Table TH.-^!. — Claims Experience For All Respondents-- (?PI )
New claims filed
Year
New Claims
•1976
228
1975
357
1974
310
1973
226
1972
187
1971
85
1970
81
ms Damages Sought
$98. 1 million
40.7 million
47.4 million
40.2 million
17.1 million
17.4 mil 1 ion
6. 1 mill ion
Claims settled out of court
Year
No . of CI aims
Werage Anoun:
Per CI ai'n*
506, 052
122, 6G6
163, 9~2
196,889
98,8^6
246,603
95,297
Amounts Paid
••1976
52
$
451 , 949
1975
67
, 4',6, 441
1974
37
3^4,706
1973
32
310,067
1972
12
153,955
1971
26
3C3,70O
1970
31
233,534
Court judgments
Year
Suits V.on
Suits Lost
Juc
gments Paid
••1976
4
3
$ 66,000
1975
7
5
229,500
1974
n
9
492,000
1973
4
5
29,000
1972
8
0
-0-
1971
6
2
97,757
1970
7
7
60,000
Claims/suits pending at end of year
Year Number
1976"
1975
1974
1973
1972
1971
1970
254
231
181
95
79
60
52
Damages Sought
$150. 2 million
77.1 millicri
73.2 millicn
52 . 4 Tiill icT
37.5 millicn
19.4 mil lien
14.4 million
• Companies did r:ot report amount of damage:
claims reported. These averages are based
claims for which amounts were reported.
••Data for 1976 are incomplete.
iought for all
only on th:)S°
III-77
Table III-30 » --Primary Product Liability Insurance-- Aver age Annual
Cost Per Thousand Dollars of Sales. — (CMF)
Year
Average Cost
No . of Firms
Sales under $5 million
1976
1975
1974
1973
1972
1971
$1.25
.81
.55
.55
.58
.47
60
57
36
25
17
13
Sales of $5 to $10 million
1976
1975
1974
1973
1972
1971
$1
31
71
56
34
40
43
27
27
21
16
12
10
Sales over $10 million
1976
1975
1974
1973
1972
1971
$1
04
40
32
32
40
43
34
31
30
28
26
24
All firms
1976
1975
1974
1973
1972
1971
$1
20
68
47
41
46
44
121
115
87
69
55
47
III-78
Table III-3 1 . — Claims Experience of Reporting Firms-- ( CMF)
New claims filed
Year
1975
1974
1973
1972
1971
N
ew
Claims
26
14
13
13
5
Damages Sought
$ 9,676,000
4,050,000
1 ,270,000
825,000
1 ,300,000
Claims settled out of court, 1971-75
Si ze of Firm
Under $5 million
$5 to $10 million
Over $10 million
All Firms
No.
of CI
aims
Amount Paid
4
$ 18,300
6
66,000
13
371 ,000
23
455,300
Court judgments, 1971-75
Total court suits
Won by defendant
Lost by defendant
Judgments Paid
5
3
2
$451 ,000
Claims/suits pending at end of year
Year
Number
Damages Sought
1975
1974
1973
1972
1971
20
8
6
3
2
$9,650,000
3,450,000
2,500,000
1 ,705,000
1 ,500,000
III-79
Table III-32 . --Average Insurance Costs Per Firm--(ADCI)
Primary product liability insurance
Year
1975
1974
1973
1972
1971
Average Cost
$21 ,."(5 7
17,762
12,400
12,671
1 1 , 132
No. of Firms
26
21
19
15
14
Umbrella coverage
Year
1975
1974
1973
1972
1971
Average Cost
$ 4,033
3,642
3,509
3,613
2,580
No. of Firms
29
24
21
15
13
III-80
Table III-33 . -Product Liabil ity Insurance-Average Annual Cost
Per Thousand Dollars of Sales-(RVIA)
Year
Average Cost
No . of Firms*
Manufacturers
1976
1975
1974
1973
1972
1971
$3.40
2.67
1.78
1.69
1.88
1.89
22
10
16
16
12
9
Suppl ier s
1976
1975
1974
1973
1972
1971
$4.59
**2.50
**1.55
**1 .05
**1.20
**1 .20
* The number of firms reporting is estimated
**Estimated from graphed information.
II I -81
Table 111-3^ . -Claims Experience Since 1 970 ,
by Size of Firm.-(ATMI)
No.
of F
irms
No
.
of Firms
Size of Sales
Re
porting
Wi_
th
Claims
Under $5 million
14
0
$5 to $10 million
28
3
$10 to $50 million
59
11
$50 to $100 million
18
7
Over $100 million
29
21
Totals
148
42
Number of pending claims at end of 1970 and 1975
Size of Sales
No . of Pend ing
Claims--1970
Under $5 million
0
$5 to $10 million
0
$10 to $50 million
10
$50 to $100 million
0
Over $100 million
15
Totals
25
No . of Pend ing
Claims--1975
0
1
5
l"
76
83
Amount of damages sought in pending claims at end
of 1970 and 1975.
Size of Sales
Damages
Sought — 1970
Damages
Sought — 1975
Under $5 million
$5 to $10 million
$10 to $50 million
$50 to $100 million
Over $100 million
Totals
-0-
-0-
$ 425,000
-0-
4,692,500
$5, 117,500
$ 435,000
6,460, 000
250,000
86, 175,648
$93,320,648
III-82
Table III-35 ♦ -Product Liabil ity Insurance-Average Annual Cost
Per Thousand Dollars of Sales- (WWEMA)
Year Average Cost No . of Firms
Sales under $1 million
1975 $3.42 3
1974 (*)
1973 2.63 2
1972 (*)
1971 (*)
1970 (*)
Sales of $1 to $5 million
1975 $1.18 9
1974 .59 8
1973 .57 8
1972 .48 6
1971 .47 5
1970 .34 5
Sales over $5 million
1975 $1.75 8
1974 .65 8
1973 .51 6
1972 .60 5
1971 .36 4
1970 .33 3
*Inadequate data.
III-83
Table III-36 . -Claims Experience of Reporting Firms- (WWEMA)
New claims filed
Year New Claims Damages Sought No. of Firms
1975
17
$3,892,000
11
1974
16
746,000
12
1973
15
765,000
12
1972
8
1 ,909,000
12
1971
6
3,821 ,000
12
1970
5
273,000
10
Claims/suits pending at end of year
Year Number Damages Sought
1975 26 $10,088,000
1973 10 6,159,000
1971 2 5,075,000
Table III-37 . /Product Liabil ity Insurance Premiums- Aver age
Percentage Increases- (RETORT)
Year Average Percent Increase No . of Firms
Sales under $2.5 million
1975-76 310 percent 17
1974-75 75 percent 19
1973-74 25 percent 17
Sales of $2.5 to $10 million
1975-76 550 percent 8
1974-75 10 percent 10
1973-74 15 percent 8
Sales over $10 million
1975-76 60 percent 14
1974-75 60 percent 15
1973-74 5 percent 14
III-84
Chapter IV
Product Liability
Prevention Techniques
CHAPTER IV--PRODUCT LIABILITY PREVENTION TECHNIQUES
INTRODUCTION
The Task Force has indicated that one of the three basic
causes of the product liability problem is that some
manufacturers produce some unsafe products. Product liability
loss prevention techniques may help address this cause and reduce
claims. See pp. 1-24 - 26. This report analyzes remedies that
might stimulate further use of these techniques. See pp. VII-
175. On the other hand, it has noted that one of the positive
impacts of the product liability problem is that more
manufacturers appear to be devoting more time and effort to
product safety. This chapter shows what the industry contractor,
trade association surveys, and other Task Force sources found
about the use of product liability prevention programs in our
target industries.
It is generally agreed that a direct way to increase product
safety is to ensure that unsafe or defective products do not
enter the market. Yet, while agreement exists on this point,
there is a difference of opinion concerning whether this ideal is
attainable even if product liability prevention techniques were
employed to the maximum extent practicable by manufacturers. The
difference of opinion reflects individual beliefs and judgments
as to the causes of accidents and the feasibility of establishing
a "zero defect" manufacturing operation at a reasonable cost
about the utility of product safety/quality assurance programs.
Our industry contractor examined three basic issues:
• The extent to which Product Liability Prevention (PLP)
techniques were being used by manufacturers.
• The demonstrated or perceived utility of these programs
in terms of accident reduction, reduced claims, or lower
insurance costs.
• Incentives or barriers to the establishment of PLP
programs .
On the basis of the industry study and other information that
has come to the attention of the Task Force, we note that there
IV-1
appears to be a trend toward greater use of product liability
prevention on the part of manufacturers. On the other hand, some
manufacturers are uncertain as to whether the programs reduce
either insurance costs or product liability claims. It would be
helpful if there were more incentives for the use of effective
PLP programs. In order to learn more, see pp. VI -49 - 52.
ELEMENTS OF A PRODUCT LIABILITY PREVENTION PROGRAM (PLPP)
A PLPP may take many forms and may be identified under
various titles such as product safety, product assurance, and
risk management practices. Generally speaking, a comprehensive
PLPP will contain elements that describe corporate responsibility
from initial research and development through sales and service
activities .
The _rnajor elements that might be included in a product
liability prevention program are as follows:
• An explicit company policy concerning product safety,
quality control, and risk prevention.
• Rigorous testing of the program within the context of
its use environment.
• A product loss control committee headed by a person
representing top management, who has clear authority to
coordinate loss control activities. Members of the
committee should include representatives from research,
engineering and design, production, quality control,
marketing, legal, safety, and insurance departments.
• Procedures to assure that government standards and
regulations which apply to product safety are understood
and considered at all operating levels and are used as
minimum requirements in product design.
• Procedures for evaluating the potential for personal
injury or property damage during use, or reasonably
expected misuse, of proposed new products or changes in
existing products.
IV-2
• Review of existing quality control procedures in
relation to developing product liability law.
Procedures that are clearly defined, well understood and
closely followed.
• Adherence to quality control and inspection procedures
that are systematically documented.
• Conspicuous posting of warnings and instructions in a
permanent form where such information is necessary.
• Review of all advertising, brochures, labels, warnings,
warranties, and instructions by engineering and legal
departments to ensure that the information provided is
accurate, clear and complete.
• Permanent coding of components in order to identify the
source, place and date of manufacture.
• Systematic procedures for investigating product
liability incidents and implementing remedial measures
where necessary.
• Maintenance of records through the expected life of each
product, to include information on research, design,
tests, quality control, sales, service and ownerships.
THE IMPLEMENTATION OF PRODUCT LIABILITY PREVENTION TECHNIQUES BY
MANUFACTURERS
Introduction
Virtually all PLP programs suggested for industry's adoption
stress a number of similar processes or practices. These include
quality control, design/redesign review, labeling and packaging
improvement, review of advertisements and warranties and, when
applicable, greater emphasis on maintenance and servicing
procedures for purchased or leased equipment produced by the
firm .
The results of the Industry Study's telephone survey with
respect to product liability prevention practices are discussed
below. Also included is a discussion of the major product
IV-3
liability prevention
manufacturers .
techniques that are employed
by
Results of Industry Study's Telephone Survey
Table IV-1 displays responses to the product liability
telephone survey. The most significant impacts on improved
safety were judged by the respondents to be in the areas of
product manufacturing and quality control, product design and
engineering, and instructions and/or warnings, in that order.
The other aspects of product safety programs were generally
considered to have little or no impact. Generally, the responses
were consistent across the various company size categories.
However, for the product safety programs designated as, "Product
Design and Engineering" and "Product Manufacturing and Quality
Control," the percentage of firms reportin_g_these programs__as
being "not applicable" was inversely related to the size of the
firim^__
Percent of Firms Reporting
"Not Applicable" for Certain Product
Safety Programs, by Size of Sales
Size of firms
Product design
and engineering
Product manuf ac tur ini
and quality control
Less than $2.5
mill ion
$2.5 million to
$100 million
$100 million
and over
49.6
24.4
12.2
40.8
15. 1
8.7
The frequency of inspections by insurance carriers' loss
prevention engineers was also related to the size of firms.
lV-4
Inspections by Insurance Carriers During
the Last Two Years, by Size of Sales
Size of firms Number of firms Percentage of firms
Less than $2.5
million 39 5M.2
$2.5 million to
$100 million 75 72.1
$100 million and
over, 81 73.6
Of the 195 firms with inspections during the past two years,
only 82 (42 percent) reported that specific recommendations for
reducing claims were received from their insurance carriers.
Thus, 71 percent of the 286 firms surveyed with product
liability coverage did not receive advice from their insurers
during the 1975-1976 period. Recommendations having the greatest
acceptance were augmentation of quality control procedures (41
percent), and improved labeling (21 percent). It would be useful
to know more in regard to whether and how manufacturers followed
up on these recommendations.
About 37 percent of the respondents to the telephone survey
indicated that their firms had a special program directed at
reducing product liability claims.
As shown in Table IV-2, larger firms were involved in these
programs to a greater extent than smaller firms. Most of the
programs have been in effect for some time; approximately 70
percent were initiated prior to 1974.
The largest number of actions undertaken to reduce product
liability claims were directed toward improved labeling and
augmented quality control procedures. There was no significant
difference in this emphasis among the three size categories.
However, the largest firms also engaged in product redesign to a
substantial degree.
Approximately 18 percent of respondents indicated that
special programs to reduce claims for the nine specified product
categories had been considered for implementation during the past
IV-5
year. The number and percentage of firms considering such a
program, by size category, are shown in Table IV-3. Generally,
about two-thirds of the firms considering such programs plan to
augment quality control procedures. About 45 percent have
emphasized product design.
Of concern are the manufacturers that either do not have or
plan to implement product liability prevention programs in the
basic areas of design research and quality control. While some
manufacturers in our target groups may not require formal
programs, we must remember that the target industries produced
relatively high-risk products.
Quality Control
This area of product quality assurance ha
great emphasis by manufacturers well befo
liability issue surfaced. As an example,
contacted by the industry contractor's tel
percent indicated that they had product safe
with product manufacture and quality control,
of such programs, the manuf ac tur ing-testing-
these programs was judged to be most effec
limiting liability exposure. We need to kno
percent had no program. The figure would appe
be of concern .
s tended to receive
re the products
of the 337 firms
ephone survey, 60
ty programs dealing
Of all the aspects
inspection phase of
tive in terms of
w more as to why 40
ar high enough to
The amount of quality control exercised by manufacturers will
vary depending on the type of product being manufactured, the
potential hazard the product affords, unit cost, various
certification or standards compliance procedures and the like.
For example, one aircraft component manufacturer contacted in
relation to this study indicated that one out of every six of his
workforce is engaged in quality control. Pharmaceuticals are
illustrative of another product category where exhaustive quality
control practices are exercised not only on the finished product
but throughout the manufacturing process, including evaluation of
raw materials before use. With the passage of the Medical
Devices Amendments Act of 1976, it will follow that more
stringent quality control procedures will be adopted by
manufacturers producing those products.
IV-6
The abrasive wheel industry represents another sector where
strict loss control standards--with particular emphasis on
quality control — have been adopted in order to reduce injuries or
hold down insurance costs. These programs which were instituted
many years ago have been effective, at least until recently, in
terms of the aforementioned goals. However, a survey conducted
by the Grinding Wheel Institute in 1976 indicated that for 18
firms, which account for about 70 percent of grinding wheel
sales, there have been substantial increases in claims and
attendant increases in insurance premiums since 1970.
On the opposite end of the spectrum, there are manufacturers
who produce a variety of products in large quantities at low unit
cost. Nonferrous castings are one such example. For many such
products the only inspection to determine if quality standards
have been met, may occur as a part of the finishing process when
obvious defects are discovered by the employee. However, since
the products are often supplied to another manufacturer, who in
turn uses the castings as a part of larger assembly, the part may
be subjected to further testing and inspection before reaching
the ultimate user; however, in some cases one might question
whether it is in the interest of product users to permit this
rel iance .
Labeling and Product Warnings
The results of the telephone survey conducted by the industry
contractor in nine product categories indicate that for firms
which responded to the question (273 firms) , about two-thirds
placed some emphasis on the review and improvement of
instructions and warnings. For the 125 firms which indicated
that special product liability programs had been initiated as a
protective measure, about half indicated that specific action had
been taken to improve labeling and/or warnings. Those answering
the question concerning the demonstrated or perceived
effectiveness of this PLP program element ranked activities
relating to instructions and warnings somewhat lower than efforts
devoted to care in product manufacturing and quality control, but
of about equal importance to design and engineering. Consumer
groups or engineers may see this "ranking order" from a very
different perspective.
IV-7
t
The critical appraisal and necessary revision of instructions,
warnings, advertisements and warranties can be accomplished much
more readily and economically than other labor-demanding aspects
of PLP programs such as design, engineering and quality control
activities. For ^ t jjj^s reason implementation of this segjnent_j)f a
total program should be particularry~atTFactive to small business
firms which may be unwilling or unaFI~e~to~1aunch a more extensive
PLP program.
Product Redesign and Removal of Products from
the Market
One measure of the impact of PLP programs on industry derives
from an understanding of what a firm does differently in terms of
production or distribution of products in order to lessen product
liability claims exposure. The industry contractor attempted to
gain insights concerning these impacts by questioning firms which
have ongoing product safety or other special programs designed to
reduce product liability exposure. The questions were designed
to elicit information on the amount of redesign and retrofit that
has been instituted by firms, and the number of products that
have either been eliminated from production or never introduced
to the market. Of the firms surveyed, 125 firms indicated that
they have some form of special PLP program. Out of that number,
45 firms indicated that the redesign of one or more products had
occurred. A smaller number (21) indicated that some type of
retrofit had been accomplished.
In the category of product discontinuance, 13 of the 125
firms indicated that one or more products had been removed from
the market. Thirteen other firms which are contemplating the
establishment of a PLP program indicated that discontinuance of a
product(s) was being considered.
Finally, a question dealing with the introduction of new
products produced the finding that 26 firms out of all firms
surveyed did delay or cancel the introduction of new products as
a result of product liability-related problems.
IV-8
Recall of Products
Product recall can become necessary when substantial product
hazards are Identified after the product has reached the user.
However, these actions are undertaken rarely, for at least two
reasons .
First, manufacturers perceive that there are only a limited
number of cases occurring annually where such action is
warranted. For example, although all manufacturers of products
falling under the jurisdiction of the Consumer Product Safety
Commission are required to submit a notification of substantial
product hazard, when identified, only 124 notifications were
received by CPSC in FY 1975.
Further examination indicated that manufacturers proposed a
recall of the products in only half the cases. Redesign of the
product and discontinuance of sale were offered as remedies in
many instances.
The second reason why manufacturers try to avoid resorting to
recalls, particularly in the consumer product sector, is that
often the product cannot be traced after sale. The manufacturer
must resort to advertisements, news releases, etc., to alert the
buyer. Manufacturers may not be notified about existing claims
until a statute of limitations is about to run. It may be sound
to require attorneys who are aware and have been retained in
connection with a claim to provide reasonable notice to a
manufacturer about product defects. On the other hand, we note
that manufacturers may not take prompt voluntary action toward
recall because it is expensive, and public notification of a
manufacturer's error will adversely affect future sales.
Most PLP programs stress principles and practices which will
minimize the chances of a recall action ever being necessary.
These programs do not deal with the recall mechanism per se .
This makes a great deal of sense with respect to most consumer
products. However, in the case of capital goods and equipment, a
better opportunity exists to establish procedures which permit
products to be traced even after long periods of time.
IV-9
IMPLEMENTATION OF PRODUCT LIABILITY
PREVENTION PROGRAMS BY INSURERS
Many insurance firms offer loss control and product liability
prevention services, usually in connection with surveying and
rating the risk of an applicant for liability insurance.
Furthermore, firms which elected to assume a larger proportion of
both risk and claims handling found it in their self-interest to
increase the effectiveness of PLP programs. However, the
provision of surveys, inspections, and advice by insurers is not
universal and appears to be governed by many factors, including
size of firms.
In order to obtain insights concerning the degree to which
insurers are providing these services, the 337 firms surveyed by
the industry contractor were asked a series of questions
concerning whether insurance loss prevention services had been
received from insurers within the last two years and what effect
these services were perceived to have on the firms' operations.
The following statistics relate to firms which carry some
form of product liability insurance. About 68 percent of all
firms surveyed which had insurance had received such services
from their carriers within the last two years. Thirty-nine of
the 72 firms with sales of less than $2.5 million a year
indicated that they received such services (54 percent). The
comparable rates for medium and large firms were 72 percent and
74 percent, respectively. About 45 percent of firms receiving
some form of services received suggested changes in manufacturing
practices or for upgrading PLP programs. These generally dealt
with the areas of quality control and labeling. It would be
helpful to know more in regard to whether manufacturers do or do
not implement changes suggested by insurers.
The insurance contractor also investigated practices of
insurers in loss prevention and control. Their findings tend to
corroborate the Industry Study findings. It was determined that
66 percent of the sample of insurers have developed written
guidelines defining the type of product that normally requires a
loss control survey before an underwriting decision is made.
IV-10
Data from underwriting files also indicate that large
companies are surveyed more often than small firms, although
interviews indicate that this trend may be changing to include
more smaller manufacturers.
/
As discussed previously in this chapter, insurers appear to
have become more actively involved in recent years in evaluating
the manufacturing practices of their clients from the standpoint
of product safety and potential liability. However, some
manufacturers who have received these services are uncertain as
to what benefits result. The effect on premiums is not well
defined, nor are the benefits associated with implementation of
improved manufacturing procedures necessarily reflected by fewer
claims or reduced settlements. See Industry Report at IV-102.
It c
critical
product
clients .
role ha
will con
represen
HoweveTj^
liabil it
by insur
insuranc
expected
in these areas.
an be expected that insurers will continue to assess more
ly the product safety practices of manufacturers and the
liability prevention programs being instituted by their
However, more extensive involvement by insurers in this
s increased the cost of providing insurance coverage and
tinue to do so. For large firms, such services may
t only a small portion of the total premium cost.
the^c o st,_o^ f , inspections , periodic _S]jrjLexSj___and^ other
y prevention insurance services which might be provided
ers may add significantly to the cost of providing
e coverage to small firms_.__ For this reason, it may be
that small firms will continue to receiv^ Tess service
THE POTENTIAL USE OF PRODUCT LIABILITY PREVENTION PROGRAMS IN THE
FUTURE
If product liability prevention programs (PLPP's) are to play
a major role in the solution to the product liability problem,
then the concept must be more clearly defined and its
effectiveness must be more precisely measured and demonstrated.
For example, the general elements of product liability
prevention programs tend to be the same regardless of the product
being produced. However, in practice they vary considerably as
applied in particular firms. When PLP elements are translated
IV-1 1
into an industry or trade standard, they represent an accepted or
imposed minimum level of safety performance.
The impact of a Federal role in the development and
imposition of safety standards has sometimes been to make them
more stringent. The more stringent standards have specified
methods of production, testing, and certification that support
the purpose of protecting the population, and they may embody the
higher levels of the state-of-the-art. The standard is generally
accompanied by a complementary system of controls on the use of
the product, by licensing, certification, or other regulation.
Economic incentives for adoption of PLPP's may be lacking at
the presehT~~tTfne . Discussions with manufacturers in personal
interviews and in the telephone survey during the Industry Study
indicated that many are developing and operating product
liability loss prevention and control programs. A significant
number further indicated that insurers have provided inspections
and audits of loss prevention practices and programs. However,
generally, it is the larger firms which either have developed
these programs, or have received services from their carriers.
Moreover, many respondents further asserted that while some of
the suggestions were helpful, such as augmentation of quality
assurance activities, there was no apparent connection between
the establishment and effective operation of a loss prevention
control program and insurance rate setting. Chapter VII, p. 177,
discusses remedial measures in regard to this problem.
Manufacturers want to know how product liability loss control
programs benefit them with respect to the amount of premiums
paid. However, the way in which this occurs, and the relative
effect of PL? practices compared to other factors such as claims
experience, or estimates of future losses, is not being
communicated to many manufacturers. Because offsetting cost
savings may not be identified or perceived to exist, further
expenditures for new or improved PLPP's may appear less
attractive to management. Improvement in the communication of
the direct monetary savings achievable from adequate PLPP's, from
the insurer to the manufacturer, might serve to foster wider
adoption of such programs in the future.
IV-12
GOVERNMENT AND PRODUCT LIABILITY PREVENTION
The industry contractor reviewed the status of five major
government programs relating to safety and standardization. From
this review and analysis, it is apparent that government safety
enforcement programs encourage companies to install product
liability prevention programs. However, the incentives
associated with PLPP establishment and operation vary as a
function of the enforcement program in question.
For example, in the case of OSHA, the government role is
minimal in terms of fostering the adoption of PLPP's. The
government inspects only to assure that firms are in compliance
with promulgated standards. In the case of FAA and FDA, there is
much more of a Federal presence, which virtually assures that
companies subject to Federal standards governing aircraft
certification or pharmaceutical manufacture have formal PLPP's.
The quality of these problems may still vary.
Both FAA and FDA go beyond merely inspecting to determine
whether standards are or are not being met. BecajJse___.ii___insijSts
that all drug manufacturers meet FDA "good manufacturing
practic"eF7" even the srnaTre"st"manufacturer must" have a PLPP in
plac^e. Similarly, manufacturers of aircraft and component parts
of aircraft, because of the stringent airworthiness requirements
(where parts must be built to standard, are subject to
maintenance standards, and can be required to be recalled for
modification at any time), must also have in effect total PLPP's.
PRODUCT STANDARDS
Many of the nation's present standards programs consist of
the development and use of voluntary industrial standards
(important exceptions are OSHA, FAA, and FDA standards). The
problems in reaching an agreement on a proposed voluntary
standard are based, at least in part, on economic tradeoffs that
each potential standards user must make in order to develop or
accept the standard, based on his particular environment and
posture. The measures that are applied can often be quite
different with respect to users engaged in the same activities.
Because of this, agreement is often difficult to obtain and
IV-13
compromise is required. When a high degree of compromise is
required, it is less likely that the standard will be accepted
outside of the adopting industry.
Two of the organizations in the United States are concerned
exclusively with the preparation, approval, and publication of
voluntary consensus standards. These are the American Society
for Testing and Materials (ASTM) and the American National
Standards Institute (ANSI). The Standards Development Services
Section (SDSS), previously Office of Engineering Standards
Services (OESS), of the National Bureau of Standards, U.S.
Department of Commerce, has a similar function, as do parts of
other organizations. A typical example is the Codes and
Standards Division of the American Society for Mechanical
Engineers ( ASME) .
ASTM was incorporated for the promotion of knowledge of the
materials of engineering, and the standardization of
specifications and the methods of testing. In 1971 a modified
program was adopted to include the development of standards on
characteristics and performance of materials, products, systems,
and services, and the promotion of related knowledge. ASTM is
now concerned entirely with the preparation of standards and with
the well-being of the voluntary standards system and is the
source of more than half the existing American National Standards
approved by ANSI.
ANSI is also concerned with effectiveness of standards. It
seeks to accomplish this through procedures for:
• Certification of standards-making processes of other
organizations.
• Initiation of new standards-making projects.
• Examination of standards prepared by others to determine
if they meet the requirements for a consensus of
interested parties to an extent suitable for approval as
American National Standards.
ANSI organizes, supervises, and controls the membership of
many committees that prepare standards for approval under the
ANSI procedures. Usually ANSI does this at the request of
IV-14
several of the affected parties or when it concludes no other
organization is suitable to carry out the work. Almost 25
percent of the American National Standards currently come from
these committees.
Safety standards are a small minority of all published
standards. For example, of the 6,000 standards approved to date
by the American National Standards Institute, only 4M0 of them
apply to occupational safety and health, safety of household and
industrial products, highway and traffic safety, and recreational
safety .
The SDSS manages the Voluntary Product Standards program
established by 15 CFR, Section 10.0 (1977). It develops
standards under a prescribed consensus procedure. An important
criterion for undertaking the development of a standard by SDSS
is that the standard cannot be processed according to the needs
or the desires of the proponent group by a private national
standards body. However, SDSS finds it difficult to enforce this
rule in all cases. Some groups prefer to use the SDSS to develop
standards, believing the SDSS adds a "Federal presence" that
makes the resulting standards more credible. Sometimes
legislative pressures encourage this. While the SDSS procedure
is an important stopgap in the voluntary system, it has processed
relatively few standards--about three percent of those extant.
The Codes and Standards Division of ASME prepares the Boiler
and Pressure Vessel Code which is now referenced in the laws of
most states, most large U.S. cities, and all the Canadian
Provinces. The ASME Codes and Standards Division is also
responsible for 40 performance test codes for turbines,
combustion engines, and other large mechanical equipment.
Trade associations also produce voluntary standards that
usually are a consensus of only producers or suppliers. The
standards may cover safety, interchangeabil ity , testing methods,
and other product characteristics which the association members
believe are technically desirable to standardize. They describe
what the industry is prepared to supply, bi;t often t'ncy require a
sophisticated purchaser to understand t^f^m. In some cases users
of the product are able to p.^r t ic i p.'? t o , ?i t loast to some extent,
in the development of tl"e 5t .*■■' r' ?irr! s . In other cases the
T'/-l
associations rely on their contacts with user organizations or
individual customers for user inputs. A number of trade
association standards have gained national acceptance.
Some of the trade associations that have produced large
numbers of standards include the Aerospace Industries
Association, American Petroleum Institute, Association of
American Railroads, Electronic Industries Association,
Manufacturing Chemists Association, and the National Electrical
Manufacturers Association. Some trade associations willingly
conduct their standards-writing efforts within professional
standards-writing bodies such as ASTM.
Professional societies in the scientific and engineering
fields usually have been organized to advance their professions
or the branch of science or engineering with which they are
concerned. Many of the standards they develop are of the
technical, nonproduct, noncommercial type (nomenclature,
graphical symbols, test methods). Many others deal with
processes and materials and components of interest to the
profession. Usually only members of the society serve on the
committees that develop these standards, but the society
membership often represents producers, users, academia,
government, and other interests. Thus, some societies achieve an
excellent balance of interests on their standards-development
committees .
There are a number of technical organizations that have been
formed for particular industries. A good example is the
Technical Association of the Pulp and Paper Industry. Their
membership includes all kinds of scientists and engineers who are
working in the industry. Many of these organizations are allied
closely to trade associations but operate much like professional
societies .
The professional and technical organizations contributing the
most standards are the American Concrete Institute, American Oil
Chemists Society, American Society of Agricultural Engineers,
American Society of Mechanical Engineers, Institute of Electrical
-'iri'-j Rlectronics Engineers, Society of Automotive Engineers, and
t,ho ■iv>r:hn i cnl Association of the Pulp and Paper Industry.
1 V- 1 r
There are also a number of standards-making organizations
that cannot be classified in any of the previous groups. These
include :
(1) The National Fire Protection Association (NFPA) which
publishes National Fire Codes and the National
Electrical Code which serve as a basis for state and
local fire control and building code ordinances.
(2) Underwriters Laboratories, Inc. (UL) which develops
safety standards, including testing procedures, for use
in evaluating and listing materials, products, and
systems for adequacy to prevent fire, crime, and
casualty. Many UL standards have been approved as
American National Standards.
(3) Factory Mutual Engineering Corporation (FMEC) which
develops safety standards and testing procedures for use
in evaluating equipment in a manner similar to UL in
other fields. The standards have wide recognition by
insurance and safety officials but are not submitted for
approval as American National Standards.
(4) The American Insurance Association; Building Officials
and Code Administrators, International; International
Conference of Building Officials; and Southern Building
Code Congress prepare model building codes covering a
range of products and practices. Many state and local
governments apply these model codes within their
jurisdictions. The codes incorporate or reference many
American National Standards and standards of other
organizations .
The preceding discussion indicates that voluntary standards
have been developed for a large number of industrial products
and, to a lesser extent, for many of the products produced for
use by the consumer.
The report's discussion about the use of these standards in
product liability litigation is set forth at p. VII-33.
IV-17
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IV-20
Chapter V
Product Liability Insurance
PRODUCT LIABILITY INSURANCE
INTRODUCTION
Scope and Purpose of Analysis
This Chapter analyzes the functions of the product liability
insurance system in order to identify practices that have
contributed to product liability insurance problems and to
suggest ways in which these practices might be improved.
Several information sources were used in the development of
this analysis, many of which have become available subsequent to
the publication of the Briefing Report. The primary sources
relied on are the contractors' reports prepared for the Task
Force, the preliminary results of the Closed Claim Survey
undertaken by the Insurance Services Office (ISO), product
liability underwriting experience through 197^ compiled by ISO,
financial data on the property-casualty insurance industry
assembled from both company reports and the trade press, and
testimony presented to the Subcommittee on Capital, Investment
and Business Opportunities of the U.S. House of Representatives'
Comm.ittee on Small Business. The Insurance Study prepared by
McKinsey & Co. for the Task Force was useful for its discussion
of underwriting practices and the data presented in the Industry
Study prepared by Gordon Associates for the Task Force
contributed to the discussion of premium increases and their
variations among firms.
The approach used in this chapter is based on the objectives
of the system from a public policy standpoint. These objectives
relate to the obligations of the system to the parties served:
• insurance companies (the insurer)
• product manufacturers and suppliers (the insured)
• product users and accident victims, whether or not
product users (the claimants)
The practices which are subsequently discussed and the
remedies suggested should be considered in relation to each of
the objectives. This point is emphasized because of the
V-1
interdependence of the objectives. A brief discussion
objectives and the issues within them follows:
of the
The Maintenance of Sufficient Fundinj
the Payment of Legitimate Claims
to Assure
The basic issue under this objective is whether insurance
companies maintain sufficient funding to assure potential
claimants that they will receive payment for legitimate claims.
This objective is important to potential claimants, but if it is
over-emphasized to the extent that companies over-reserve, both
the cost and availability of product liability insurance would be
adversely affected.
The Availability of Insurance to all Reasonably
Insurable Product Manufacturers and Suppliers at
a Cost Reasonably Commensurate With Product Risk
Implicit in this objective is the concept that product
liability coverage should be made available to those who need to
purchase it and are reasonably insurable. Insofar as insurance
companies ultimately have to pay claims against their insureds,
however, the cost of such coverage must be priced in such a
manner that liabilities, including defense and other loss
adjustment expense costs, are covered; i.e., the premium should
reflect the product risk. The basic issues here are whether
premiums actually refl_ect_costs related to the product risk and
whether premiums charged different policyholders are equitable.
A primary policy conclusion implicit in this discussion is that
if premiums are soundly assessed and commensurate with risk and
still are too costly for the insured, the solution probably lies
outside the insurance system. If the premiums are assessed
unreasonably, however, the system should be revised. If the data
available are insufficient to permit reaching a conclusion either
way, then means must be found for collecting the data necessary
to make valid judgments about proper rate levels.
The Opportunity for Insurance Companies to Make a
Reasonable Profit
While the other objectives relate to the needs of claimants
and the insured, this one recognizes that insurance co-'ipanies are
V-2
entitled to conduct business at an overall profit. This does not
mean that insurers are entitled, or can reasonably expect, to
make a profit on every policy.
Organization of the Chapter
Current concerns relate principally to the problems faced by
product manufacturers and suppliers in obtaining insurance at a
cost they can afford. The remainder of this chapter focuses
primarily on that need and the practices which adversely affect
it. Solutions must, however, be considered in relation not only
to this need but also for their effects on the other legitimate
objectives of the system.
The subjects addressed in this chapter and the policy issues
within each of them are:
The Product Liability Insurance Policy . — This section
describes the types of policies that are usually written, and
trends in coverage limitations. This section appears in this
chapter primarily for explanatory purposes. A further discussion
of the trends and policy implications of coverage limitations is
to be found in Chapter VI.
The Underwriting and Pricing Process . — This section describes
the manner in which product liability premiums are determined by
insurance underwriters. It is frequently alleged by product
manufacturers and suppliers that premiums are rising dramatically
and questions are raised concerning the basis for determining the
premium amount and the relationship of that amount to the risk
covered. This section addresses these issues and discusses means
by which the system might be improved.
The
Rise in Product Liabil ity Premiums . — This section
analyzes the data available on premiums that have been charged in
selected industries and compares premiums paid by firms in
different industries and by company size groups. The issues
addressed include whether small businesses pay unreasonably more
for product liability insurance than large ones. (See also
pp. VI-11 regarding af fordabil ity of insurance.)
V-3
Underwriting and Claims Experience. --This section presents
data provided by the Insurance Services Office (ISO) on its
estimates regarding underwriting experience and on the
preliminary results of its Closed Claim Survey.
The Financial Situation in the Insurance Industry . — This
section presents aggregate financial data for the property-
casualty industry and for the miscellaneous liability insurance
line which includes product liability insurance. The purpose of
this section is to discuss overall capacity and underwriting
experience and
availability .
their implications for insurance costs
and
Reinsurance and Surplus Lines Insurance. — This section seeks
to assess the role of reinsurance and surplus lines insurance in
the existing product liability insurance market, along with their
potential impacts on availability and costs.
Limitations of the Analysis
The principal limitations on the analysis developed in this
chapter derive from lack of data and information specific to
product liability. Comprehensive data are not available on
product liability claims costs, payments, premiums, reserving
practices, amounts of product liability coverage provided by
reinsurers, and other indicators of product liability procedures
used by the industry.
Although data are limited, it was possible to use the
available information for some analysis. However, it should be
noted that these evaluations of the financial situation in the
insurance industry, current reserving practices, private
reinsurance, impacts of underwriting practices, and other issues
cannot be regarded as thorough. In the absence of precise
information as to premiums attributable to product liability and
the amounts of the unearned premium and loss reserves
specifically allocable to product liability, it is not possible
to determine the investment income properly allocable to product
liability coverages. It is also not possible to determine
precisely the relationship of premium costs to actual claims
costs and, in particular, to actual payments to claimants.
V-4
THE PRODUCT LIABILITY INSURANCE POLICY
Introduction
This section gives a general description of product liability
insurance policies, and discusses some of the issues that have
arisen concerning product liability coverage.
The typical product liability insurance policy consists of an
agreement between an insurance company and a product manufacturer
or supplier (the insured) whereby, for a price (the premium), the
insurance company agrees that it will defend all claims and pay,
up to a maximum amount, all legal obligations of the insured
attributable to products covered by the policy and from which
damages were sustained during the policy period.
Product insurance usually provides coverage on what is called
"occurrence" basis, whereby coverage is provided for all product-
related damages that occur during the policy period. Neither
the time of manufacture of the product nor the time at which the
claim is made determines whether the policy provides coverage.
Types of Policies
Product liability coverage traditionally has been provided
within one of the two major types of primary policies, namely.
Comprehensive General Liability and Commercial Multi-Peril
Package policies. Comprehensive General Liability Policies (CGL)
can provide coverage for a number of different types of
liabilities including products liability and completed operations
coverage which covers liability for installation and servicing
work but only after such work has been completed or abandoned.
Product liability, including coverage issued under CGL policies,
is predominantly written on a monoline basis. When it is said
that such coverage is written on a monoline basis, this simply
means that the premium is allocable and allocated to the specific
hazard being insured, i.e., the products-completed operations
hazard. Package policies, which provide property coverage in
addition to the third party coverages offered by CGL policies,
are frequently referred to as "multi-line policies."
V-5
Limits of Coverage
Comprehensive General Liability coverage may be limited in
two ways: 1) the limit for each occurrence, and 2) the aggregate
annual limit for all occurrences within the policy period. The
limits are usually exclusive of legal defense costs. If either
limit is reached, further losses are uninsured.
Most product liability insureds purchase more than the basic
annual limits which are $25,000 per occurrence for bodily injury
and $5,000 per occurrence for property damage with aggregate
annual limits of $50,000 for bodily injuries and $25,000 for
property damage. Limits between $25,000 and $1 million are
usually covered in the primary policy. Limits in excess of the
basic amounts can be provided by "excess" or "umbrella" policies
which are written in ^^^___^__ spread the 1 lability among
different insurers. (See pp. VI-8 for a discussion of policy
limitations as they affect availability of product coverage.)
Deductibles
A deductible is that amount which the insured agrees to pay
and which must be exceeded before the insurance company pays.
Deductibles are commonly used in personal lines of property
insurance (such as automobile collision, homeowners, etc.) where
they serve the purpose of reducing premiums through avoidance of
the cost of adjusting large numbers of small losses. Deductibles
have not traditionally been used in commercial liability
insurance. Both the Insurance and Industry Studies attempted to
develop data on this subject. The Insurance Study showed that
less than 3% of the 3,000 policies reviewed included deductibles.
Those companies with deductibles were distributed as shown in
Table V-1 .
The Industry Study showed that in recent years there has been
an increase in the use of deductibiles among the companies
surveyed. (See Table V-2).
Occurrence versus Claims-Made Policies
As has been indicated, standard product liability coverage
applies to claims that are made against the insured due to bodily
V-6
injury or property damage which occur during the policy period.
Under a "claims-made" policy, the insurer is only liable for
claims made during the policy period.
It has been suggested that the product liability insurance
problem might be alleviated if insurers changed from an
occurrence basis to a claims-made basis. An analogy is made with
medical malpractice, where claims-made policies were introduced
to reduce speculation in the ratemaking process and the extent of
coverage .
However, one must be cautious about analogizing between
medical malpractice and product liability. The "occurrence"
covered by the malpractice insurer is the negligent medical or
surgical procedure performed by the physician during the policy
period. Thus, if a surgical sponge were to remain undetected in
a patient for ten years before overt symptoms erupted, the
insurer having the coverage when the surgery was performed would
have the responsibility for payment of the loss under an
occurrence policy. Where such long-delayed results are common,
an insurance actuary must try to predict the cost of losses which
will be paid many years in the future. Changes in the legal
system and inflation in the intervening years, make such
predictions extremely difficult. Under a claims-made policy,
these uncertainties would be el iminated--the insurer would not
have to worry about claims made in the future, but only those
brought during the current policy year.
The situation is not quite the same under product liability
insurance .
the time when the product injures someone.
The "occurrence" is not the time of manufacture, but
According to preliminary data from the Insurance Services
Office, 95.9% of bodily injury and 96.0% of property damage
claims have been reported within 24 months of the occurrence.
See ISO Preliminary Closed Claim survey. Detailed Analysis,
47. Product liability insurers appear less concerned about these
"future" claims than they are about current claims based on
products that were manufactured in the distant past. "Claims-
made" policies cover lawsuits of this kind; thus, they do not
alleviate insurers' concerns about old products.
V-7
■9
It should be noted, however, that for certain products
claims-made policies may assist insurance actuaries in predicting
and rewarding risks. Examples include pharmaceutical products
and organic chemicals. (See Insurance Study at 4-46;4-il7.) With
respect to these products, situations may arise where there is a
substantial passage of time between the time of ingestion or
other use of the product and the time when the appearance of
overt symptoms results in a claim. Insurance actuaries may have
difficulty (analogous to the medical malpractice situation)
predicting how many claims involving delayed manifestations of
symptoms will arise in the future. Moreover, it may be necessary
for insurers to set aside substantial amounts of funds in
incurred -but-not-reported
type.
substantial
(IBNR) reserves for products of this
Claims-made policies offer an advantage aside from better
risk prediction. In that regard, there may be difficulty in
determining the date of the "occurrence" of the product injury so
as to ascertain which product liability coverage is applicable.
See Volume VII, Legal Study at 93. On the other hand, it is
always clear when a claim is made.
Claims-made coverage may help resolve these problems, but it
could create a problem for victims in situations where a company
had gone out of business since the time the initial injury-
causing event occurred: there would be no coverage for such an
incident at the time the claim was made. If a corporation were
to go out of business or to merge, there might be a need to
require that occurrence basis insurance be available for claims
made after the company has gone out of business. This is one
form of "tail coverage."
There is one facet of claims-made malpractice coverage that
may cause problems if it were brought over to the area of product
liability. According to Howard B. Clark, Special Assistant to
the Administrator of the Federal Insurance Administration, most
claims-m.ade medical malpractice insurers require that the insured
have claims-made coverage; written by the same company, both at
the time when the professional service was performed and when the
claim is made. If the analogy were made in the area of product
liability, a manufacturer might be required to have maintained
claims-made coverage at the time his product was manufactured and
V-8
at the time of the injury and at the time of the claim. If these
coverage limitations were included in a claims-made product
liability policy, they might result in some insureds being
without coverage for some products they had manufactured in the
past--this consequence would not appear to be in the interest of
either consumers or manufacturers. Compare Rotwein v. General
Accident Group, 103 N.J. Super. 370, 24? A. 2d 370 (1968)
(architect policy — upholding provision requiring insured to have
maintained claims-made coverage at the time of the negligent act)
with Jones v. Continental Ins. Co., 123 N.J. Super. 91 303 A. 2d
91 (1973) (architect policy holding invalid a provision requiring
insured to have maintained claims-made coverage by the same
insurer at the time of the negligent act.) It has been suggested
to the Task Force Staff that this problem can be easily remedied
by eliminating the "retroactive date" concept. (See letter to
the Project Director from R. Clements, 10/20/77.)
In sum, claims-made policies would reduce the degree of
speculation in the ratemaking process only with regard to
products that involve the degree of long time spans between the
time of an initial injury and the time that the injury manifests
itself. If claims-made policies are utilized in product
liability, care must be exercised to avoid coverage gaps that
could adversely affect consumers and manufacturers.
/
THE UNDERWRITING AND PRICING PROCESS
Introduction
The underwriting process encompasses both the decision by the
insurer whether to accept the risk at all, and, the
determination of the appropriate premium for the risk; i.e., the
price that will be charged for the coverage. This section
o
focuses predominantly on the means used to develop premium rates
and the increases which have been made recently in the rates
developed by the Insurance Services Office (ISO), the industry's
primary statistical compilation and rate development
organization .
The price (premium) which will be charged for product liability
coverage is determined in the underwriting process. Ideally, the
V-9
price an insured pays should reflect the actual product risk.
Such a price could be developed by determining the number of
products in the field, applying a rate developed for use
throughout the industry which would reflect the expected
incidence and cost of injury associated with the product,
appropriately modified by the prior claims experience of the
specific firm. With the addition of a profit allowance,
administrative costs and fees, the premium for a given firm would
be established .
In fact, the underwriting process is, at best, an
approximation of the foregoing. For most products coverage,
neither the insurance companies nor the Insurance Services Office
(ISO) have more than subjective estimates of the probable risk
upon which to predicate premiums. The result is that most
premiums, in the final analysis, amount to "informed best
guesses" of the individual underwriter.
The Working Task Force representative from the Federal
Insurance Administration has observed that such "informed best
guesses" are affected by such things as the competitive
environment, the insurer's overall capacity or limitations on
the capacity that the management is willing to devote to the
line, potential defense costs that may be insured and myriad
other factors.
There are different methods by which products coverage is
provided and premiums are determined. Table V-3 identifies the
types of methods used and the percent of the product liability
premium that each represents. An explanation of the various
methods follows:
10
Manual Rated (monoline ).--This is the only rating method
which uses published rates which have been statistically derived
from reported claims experience. Manual rates, that is, those
rates which are published in ISO's Product Liability Manual, are
given for 65% to 75% of the over 400 product classifications used
by ISO. Policies for which these rates apply account, however,
for only between 10% to 15% of the total product liability
premium according to ISO estimates. Manual rates are available
for low risk products and usually only apply to small firms since
large firms are more likely to use package policies or be
V-10
eligible for the special rating plans (loss rating etc.).
Premiums for manual rated, monoline policies are determined by
insurers by multiplying the published rate by the number of
"exposure units." The actual exposure units would be the number
of products covered by the policy that are and will be in use
throughout the policy period. Usually, however, a surrogate for
exposure units such as gross sales or receipts is used. Most
manual rates are stated as an amount per one thousand dollars of
sales or receipts.
Small (a) Rated ( monoline) . --This method is used in
establishing premiums for firms with monoline policies which
produce products for which there is either a high degree of
variability in claims experience or too little data on claims
experience reported for ISO to be able to calculate statistically
valid rates. No statistically reliable rates are available for
these product classes. Thus, in the Product Liability Manual,
the symbol(a) is given rather than a specific rate for those
product classes which are (a) rated. Approximately 25% to 35% of
the total number of classes are (a) rated. ISO estimates that
the (a) rated monoline policies represent 30% to 35% of the total
product liability premium. ISO does provide suggested rates for
the (a) rated classes. These suggested rates are intended as a
rough indication of the average rate appropriate for the class as
a whole and they are given only as guidelines. They are
subjective estimates and not statistically reliable. Insurers
may use them, adjust them or ignore them. In effect, therefore,
premiums for (a) rated monoline policies are based on the
subjective determination of individual underwriters and, as such,
amount to "informed best guesses."
Package Policies. — Package policies are multiline policies.
They account for approximately 30% of the total product liability
premium. The package policy premium is determined by using the
monoline rates (the manual and (a) rates) modified by a package
discount. An experience factor may also be used in calculating
the premium.
1 1
Composite Rated . — This type rating is used for large firms
producing different types of products. A composite rate is
calculated initially on the basis of a survey of the separate
exposures using the appropriate manual rate when such applies and
V-1 1
presumably selecting a factor for (a) rated products. The sum of
the rates and exposures is then divided by a selected exposure
base. ISO requested that composite rating for product liability
(except for Loss Rating) not be used after January 1, 1977.
Loss Rated. — This rating method which is a form of Composite-
rating, uses past losses to determine the premium. Only
companies which have $200,000 or more of losses at
$10,000/$10,000/$10,000 limits over the prior three years are
eligible for loss rating.
Large (a) Rated. — According to ISO, the rates for very large
companies are determined "on the basis of the specific
characteristics of that risk rather than on the class or manual
i3uG» • • •
It is relevant to note that when insurers recently responded
to a congressional inquiry regarding their product liability
ratemaking procedures, they reported that they rely primarily on
ISO rates
with
the "judgment" of individual
combined
1 3
underwriters. Each company also responded that sales and
receipts were the measure of exposure used. Only one company
referred to a consideration of numbers of products. Each company
also reported that records of exposure were kept only in terms of
dollar figures or that such records were submitted to ISO
pursuant to the Statistical Plan, but company records were not
kept .
From the foregoing discussion it can be noted that for
product liability underwriting, published rates are available
only for manual rated risks which amount to only about 10% of the
total product liability premium. In respect to the vast majority
of product liability premiums, statistically reliable rates are
not available and the line is essentially unregulated, in fact,
if not in theory. Thus, for product liability insurance, except
for the approximately 10% manual rated business, it really does
not matter whether the State is a "prior-approval" State in which
no insurer may use any rate unless it has been filed with and
approved by the regulator prior to its use, or whether it is an
"open-competition" or "file and use" State in which the insurer
may use a rate without prior approval subject to a subsequent
disapproval by the regulator if the latter establishes that the
V-12
rate is inadequate, excessive, unfairly discriminatory,
otherwise unlawful under the rate regulatory law.
or
ISO Rate Increases
The rate increases, established by ISO in August 1976 and
December 1976, provide an indication of the magnitude of product
liability premium increases which have occurred and are likely to
occur in the near future. For a discussion of the relationship
between rates and premium increases, see pp. V-28. ISO
determines the need for an overall increase in rates based on
trend projections of actual and estimated losses from prior
policy years. Having determined the amount of an overall average
increase in rates, ISO assigns weights to individual product
classes. These weights, based on the limited experience data
reported to ISO (see table V-3) and subjective judgments, are
used to factor the individual rates so that in aggregate they
will yield the overall average rate increase previously deemed
1 6
necessary
Table V-4 is a representative listing of percent increases in
product liability insurance rates established in December 1976
over those in effect in August 1975 rates for a compilation of
product liability rates provided by ISO. The compilation
includes only rate increases in excess of 100%.
Table V-4 shows increases in basic limit rates to the extent
that a firm chooses to purchase higher limits of liability,
higher premium rates will apply. Table V-5 shows the increased
limits factors currently in use for monoline rated products.
Table V-6 shows rates per $1,000 of sales for selected products
if insurance limits of $250,000 bodily injury and $50,000
property damage per occurrence were purchased.
The 1976 basic monoline rates and increased limits factors
developed by ISO and used in these comparisons are the most
current product liability rates in use and will be impacting
insurance policy renewals nationwide for the next 12 to 18
months. It appears safe to conclude that, for most of the
monoline rated products classes, insurance costs have increased
V-13
or will increase and that some of these increases will be
substantial. As is noted on p. V-28, continued, reliance on the
current methodology for determining the need for rate increases
could result in further rate increases in the near future.
ISO Statistical Compilation Activities
Although most premiums for product liability coverage are
determined quite subjectively by individual insurance companies,
increasing attention is being given to the development of more
statistically reliable rates for product liability based on
pooled experience. The primary advantage of an industry-wide
statistical agency for the gathering and compilation of
statistical data lies in its potential ability to establish a far
broader data base than could be garnered by any individual
company .
The Insurance Services Office (ISO) is currently attempting
to expand its data base and improve its ratemaking. This section
discusses the potential utility and current limitations of ISO
data collection.
ISO utilizes a Statistical Plan to collect premium and
experience data from its members and subscribers. As of June 1,
1977, the Statistical Plan for general liability used by ISO and
its subscribing insurance carriers was changed. The experience
of all composite rated, experience rated and large (a) rated
policies is to be broken out in monoline product detail by
product code except for risks with general liability aggregate
losses of over $100,000 annually. The loss experience
attributable to the product liability portion of commercial
multiperil policies is also being broken out in monoline detail.
The data using the new Statistical Plan will not be sent to
ISO by the insurers until after the 1977 policy year is over,
that is, sometime in 1978. Unless an unusually vigorous effort
is undertaken, the data will not become available until 1979.
Exposure, claims, and loss data should be obtained in usable
form sufficient to permit determination not only of indicated
general rate levels of the line but of classes within the line.
V-14
The current ISO classification plan contains over MOO separate
classifications.
To be statistically sound, rates for each product class
should be based on the claims experience per unit of exposure
that has occurred in the past. That is, assessments of the
probability of claims in the future for a given class should be
based on knowledge of claims in the past. Other factors will
continue to be used in setting individual premiums.
The procedure currently used by ISO, and described in this
Chapter, is based on aggregated incurred losses for each policy
year. In essence, the procedure amounts to determining whether
premiums have been adequate to pay for incurred losses and making
adjustments in rates accordingly.
The ISO procedures to date result in rates for most products
liability that are not statistically sound. The rates are not
necessarily reflective of actual claims experience within each
class .
Indications are that claims are not generated with sufficient
frequency to allow rates to be established for each existing
class without resorting to weighting of individual class
experience with the experience from groups of classes. It should
be noted that for many products for which insurance premiums are
very high, claims experience is not generated with great
frequency. That is, there are not many accidents that lead to
product liability claims for the product; yet, when there is a
claim, it can be a large one. Time is also needed to generate
data for new products.
When spread over the thousands of products manufactured, and
given the numerous product classes used by ISO, the data base
will not become statistically sound in a short time, if ever, for
certain existing product classes.
That data for ratemaking purposes would be generated slowly
through a process using reports of companies that subscribe to
ISO is shown clearly in the preliminary data from the Closed
Claim Survey. After having received data from approximately
7,800 closed claims, the Preliminary Report indicates that only 6
V-15
claims were closed with nonzero payment in connection with metal
cutting machine tools (product code 205) metal forming tools
(product code 206), accessories, attachments and auxiliary
equipment for machine tools (product code 207), and tools for
machine tools (product code 208).
For product code 205, there was one bodily injury claim
closed with payment of $1,500; for product code 206, there was
one bodily injury claim closed with payment of $1,250. Product
code 207 generated two bodily injury claims with payments
totaling $235,000 and two property damage claims with payments
totaling $9,3^5. Product code 208 generated no claims with
payment .
Although these are preliminary results from the ISO Closed
Claim Survey, they would indicate that even a 12-month
compilation might yield only about 24 claims with payment for
these product categories. The sparsity of the data indicates
that statistically reliable data for some product claims take
several years to accumulate. The problem could be overcome by
expanding product categories to include as many products with
similar risk characteristics as needed to produce statistically
reliable data.
The new Statistical Plan will eventually provide a somewhat
sounder basis for some product liability insurance ratemaking but
not in a short time. Nor does there appear to be a means of
accelerating the process since data will still have to come from
insurance companies after the end of each policy year, and there
will still be a required period for processing.
While preferable to the existing lack of data, historical
claims experience can never be expected to be a precise indicator
since changes in laws, inflation and other externalities may
cause deviations from the projections. For example, an item of
sports equipment which was never involved in a successful claim
in the past, although there may have been numerous injuries,
could, next year, generate a successful claim which, in turn,
might well produce a spate of similar claims.
Regulation of product liability rates has been suggested as
one possible way of controlling premium costs. Under regulation,
V-16
insurers would be required to justify their rates. The problem
is that, without a reliable data base from which claims
experience can be evaluated, it is not possible to determine with
any degree of accuracy what a reasonable rate would be. Although
rate regulation may be appropriate, the first step must be the
development of a valid experience base. If such a data base were
established it would be possible to utilize actual claim trends
as a base for establishing premiums and justifying rates. The
issue of whether or not participation by all product liability
insurers in the data collection effort can be achieved
voluntarily or should be mandated should be considered.
THE RISE IN PRODUCT LIABILITY PREMIUMS
Introduction
The primary reason that the Task Force was organized and
directed to study product liability was the concern expressed by
business firms about product liability insurance costs and the
difficulties faced by many firms in obtaining product liability
coverage .
Although there is significant evidence of product liability
premium increases, other data related to product liability
premium and claims trends are not available. One indication of
the inadequacy of data is the fact that the total aggregate
product liability premium in the U.S. is not known. The rates at
which premiums for product liability have increased are only
roughly estimated in the Insurance and Industry Studies.
However, the belief that the increases have been high can be
supported by the available data. Trends in the number and
severity of product liability claims cannot be determined from
the available data. It is, therefore, not possible to correlate
premium increases with trends in the number and severity of
claims .
The trend in premium increases is apparent both in the
substantial basic rate increases for certain product lines which
have been developed by the Insurance Services Office and by the
pricing policies of insurance underwriters as evidenced by the
premium increases experienced by companies surveyed by the
industry contractor.
V-17
The Insurance Study's estimate of the effect of ISO revisions
on product liability premium rates is shown in Table V-7. (Note
that this table does not reflect December 1976 revisions in (a)
rates. ) See p. VI-1 1 .
The insurance contractor used the results of the underwriting
file survey to estimate the impact of rate changes on rates
actually used to establish premiums. The results were reported
in the Insurance Study as follows:
". . .To obtain a clearer picture of rate changes that
have taken place in (a) rated categories, we analyzed
underwriting files that contained identical product
classifications from 197^ to 1975. Unfortunately, the small
number of companies for which these data are available make
the average increases shown less credible than would be the
case if a larger sample had been available. Further, the
wide variation in high and low increases point up the
variation in individual risk pricing decisions. Finally, it
should be noted that these findings are not representative of
the total change in rates because the product liability
policies that are composite rated, loss rated, and rated on a
retrospective basis could not be included in this analysis
since individual product rates are merged with rates for
other coverages. These, of course, are the larger accounts,
representing a fairly small percentage of the total policies
but a significant proportion of the total premium.
Therefore , al though the data clearly show that rate increases
have occurred , the stated average increases shown should be
viewed with caution; the sample is far too small to be
representative of the practices of the industry .
". . .With the preceding caveats, our analysis showed
that rates Vn the eight target classifications had
experienced average rate increases ranging from a low of ^9%
to a high of 568%. The average rate increase for all
products outside the eight target product classifications was
251%. . ."
The results of the Insurance Study's analysis referred to
above are given in Table V-8. The ranges appear more significant
than the averages since the ranges are so great.
V-18
In the survey undertaken by the industry contractor, premium
costs per $1,000 of total sales were examined. Table III-6
indicates the 1971-1976 experience of the firms surveyed.
The causes of the premium increases are more difficult to
ascertain than the fact of the increases. Since product
liability premiums are determined, generally, by applying a rate
to an individual firm's total sales, there is an escalation of
premium by reason of an increase in sales, an increase in product
price, or a combination thereof, even though there has been no
increase in the rate itself . In a limited sense, therefore,
inflation benefits insurers in that it increases the sales base.
The latest data available to the Task Force indicate that,
for at least some industries, increases iji_ product liability
jjLSimance p^remiums aje continuing. A survey conducted in April
1977 by the Machinery and Allied Products Institute (MAPI) found
that over 90% of the respondents had experienced increased
product liability insurance costs since the original MAPI survey
in August 1976^°. Thus, there is some evidence that premium
increases have not leveled off as the Insurance Study (p. ES-4)
had suggested they might.
•^ A Comparison Between Small and Large Businesses '^
In commenting on the severe increase in insurance costs in
connection with industrial machinery, industrial chemicals,
automotive component, and pharmaceutical manufacturers, the
Insurance Study concluded: "The problem of availability and
af fordabil ity of product liability insurance is concentrated in
the smaller firms in those industries." (ES-7, Insurance Study).
The data developed by the Task Force seem to substantiate the
supposition that small firms are experiencing greater premium
increases than are larger firms.
The results of the survey conducted by the industry
contractor show that small firms experienced significantly
greater increases than large firms in premium rates per $1,000 of
sales for both Comprehensive General Liability ( CGL ) as well as
for Product Liability.
V-19
Table III-5 (Chapter III) from the Industry Study presents
the calculated costs for CGL coverage per $1,000 in total sales
for the years 1971-1976 by size groups. Although all firms
experienced increases, it appears that the larger firms have a
substantially lower cost for CGL than small and medium-size
firms, and the size of the differential is increasing.
Table III-7 (Chapter III) shows the estimated average cost
per $1,000 of total sales for product liability by product
groupings. See Table III-6.
^-- On the basis of the Industry Study Survey, it appears that
the premium differential between large and small firms cannot be
explained on the basis of product risk. Table V-10 indicates
that in seven of the nine product categories for which data were
collected, firms with less than $2.5 million in total sales had
higher rates for CGL per $1,000 of total sales than their medium-
size counterparts and that in all product categories, larger
firms had rates less than one-half those of the other firms. (It
should be noted that while the medium-size firms include firms
with gross sales of $2.5 million to $100 million, 24.6% of the
respondents in the group had gross sales of less than $5 million,
while 47.7% of the respondents had gross sales of less than $10
mill ion . )
An alternative explanation has been suggested by Mr. John F.
O'Sullivan, Vice President of Marsh & McLennan, Inc., in a report
prepared on behalf of the National Association of Insurance
Brokers (NAIB) and presented to the Senate Small Business
Committee on September 8, 1976, in which he said:
". . .The insurance companies' response to their present
predicament has a severe impact on small businesses. Since
many small firms have the same potential liability exposure
as the larger firms which generate much greater premium, the
■■^^ natural tendency is not to spend time making a detailed
analysis of the relative merits of insuring the small firm.
As a result, the markets are quicker to decline coverage for
certain small firms, or if they agree to write, they charge
rates based on conservative judgment which allows for a
margin of error on the high side. Therefore, we have the
feeling that premiums currently charged small businesses
V-2 0
^
could well prove to be excessive. . ."
discussion of premium differences at pp. VI -24.
See also the
While the Insurance Study did not analyze premium increases,
it did find that larger firms had larger rate increases. This is
not necessarily inconsistent with the Industry Study findings,
for, as the Insurance Study noted:
". . .on an overall basis, rate increases were
substantially greater for large companies than for small,
this analysis is for rate increases , which may or may not be
indicative of upward or downward changes in total premium
levels , as the final premium also depends on changes in
exposures, limits of liability, application of experience.
It should also be noted that in the Insurance Study, "large
firms" were defined as those with over $2.5 million in annual
sales. The Insurance Study does not present comparative premium
data which would enable comment regarding premium levels as
opposed to rate levels.
There is some indication that the research undertaken by the
insurance contractor supports the NAIB assertion quoted above,
for the insurance contractor states:
". . .It is usually possible for the policyholder with
more than $1 0 million sales (underscoring added) to retain
essential coverage by making some adaptation-e .g . assume a
large deductible, accepting a retrospective rating plan. For
the smaller firm, particularly the single-product firm, these
adaptations are not as feasible. The account is not large
enough for its own experience to have credibility for the
insurer, and it does not have the financial resources to
share a significant proportion of the risk burden itself.
^f C- \J
It thus appears that small firms, at least in the nine
industries surveyed, are treated differently from large firms by
liability insurers, and this could have a significant adverse
impact on both small firms and the users of their products.
V-21
Table V-1 1 presents a summary of the experience reported by the
industry contractor.
The questionnaire sent by the House Small Business
Subcommittee to major insurers asked whether the size of the
insured company was a factor in the rating process and the
company's willingness to insure. (Q.20). One firm (Crum &
Forster) indicated a tendency to concentrate on smaller and
middle-size risks, and to avoid products coverage for larger
insureds. The other respondents indicated size could be a factor
and noted the following:
". . .Size is not necessarily a primary factor. It is
the product per se as well as the performance of the
manufacturer which are the governing factors in risk
selection as well as the ability to obtain an adequate
premium for the exposure." Continental
". . .The size of the insured company is an important
consideration, especially on inherently hazardous products.
If there is a chance of catastrophic loss, the larger insured
company will very likely generate a premium commensurate with
the risk, but a small company will not." The Hartford Group
". . .Because many larger companies have the ability and
willingness to pay the expense of loss prevention facilities
such as quality control, labeling, packaging, documentation,
etc. for the purpose of complying with insurance
underwriters' recommendations, the ability of a larger
company to obtain products liability insurance is often
enhanced. However, we are not unwilling to write small
companies solely because of their size." St. Paul
". . .The size of the account is a factor in the rating
and risk selection process in several respects. The size of
the account determines whether the premium level will permit
the account to qualify for the application of certain filed
rating plans--such as experience and schedule rating,
retrospective rating, composite rating, loss^ rating, etc.
The size of the account also determines the amount of
consideration which the underwriter might give to the
individual characteristics of the account as compared to the
V-22
average accjounjb_^ Financial abij^ity, management co^ntinuity and
expertise, product integrity_and quality contro_1.4.____the_ diversity
and changes in the product line, cooperation in loss control " and
c raTm~^de f e n se pr og r am s , and individual account loss experience
become moi^e_jnea5.ur-abie--a&— s-i^e--4^T^er-eas«^s . These factors may have
either a positive or negative impact on the rating and selection
process." Aetna
Certain differences in premium amounts attributable to firm
size may be justifiable. Serious questions of public policy
arise, however, where differences in the treatment of large and
small policyholders cannot be justified on the basis of expense
or loss differences between them.
Allocation of the Product Liability Premium Dollar
An important issue concerning the product liability system,
including the insurance industry component of the system, is the
efficiency with which it operates. A measure of the efficiency
is provided by the way in which the premium dollar is allocated.
The fraction of the premium dollar that is actually retained by
the claimant after paying legal costs is one indicator of the
efficiency. If the fraction of the premium dollar retained by
the successful claimant is very small, one of the principal
purposes of the system is defeated.
■ For the product liability system as a whole, little
information is available to determine the net amount paid to
claimants. Neither is it known how the amounts vary by type of
claim, by type of claimant, or how the amount has been changing
relative to other allocated amounts of the premium dollar.
Insurers generally expect premium dollars to cover losses and
underwriting expenses in order to provide a satisfactory return
on the capital employed. Losses include both the actual payments
made to settle claims and the expenses incurred in claims
investigation, legal defense, and the settlement process. These
expenses are called loss adjustment expenses. Underwriting
expenses include the salaries of underwriters, overhead
allocations, State premium taxes, bureau and board fees, and
commissions for agents and brokers.
V-23
The following tables indicate estimates of the allocation of
the product liability premium dollar. Table V-12 presents the
estimate developed by the Insurance Contractor and presented in a
letter dated July 1, 1977, to the Subcommittee on Capital
Investment and Business Opportunities, House Committee on Small
Business .
Table V-1 3 presents estimates developed
Insurance Administration.
by the Federal
The assumptions used in developing the estimates in Table V-
13 and the results are described by a spokesman for FIA as
follows :
". . .Based upon the $5.2 billion [includes medical
malpractice insurance] premiums for miscellaneous liability
in 1976, it is possible to make a rough approximation of the
ultimate distribution of those premium dollars in terms of
products liability.
Accepting ISO's estimate that about 40% of miscellaneous
liability represents products liability, about $2.08 billion
will be allocable to the latter.
In the first of the two tables printed below, a
permissible loss and loss adjustment ratio of 60% is assumed
which means that if loss and loss adjustment expenses exceed
60% of the premiums earned, underwriting profit will be
reduced or eliminated. Although ISO has used a permissible
loss and loss adjustment ratio of 57.1% in its filings for
products liabilaity manual rates, it is assumed, here, that
underwriting expenses and profit will constitute about 40% of
the premium dollar. The second table, however, assumes a 70%
permissible loss and loss adjustment expense ratio and an
underwriting expense and profit component of 30%.
Under the first table, after deducting the 40% for
expenses and profit from the $2.08 billion of premiums that
will ultimately be earned, there is left about $1.25 billion
for loss and loss adjustment expense.
V-24
According to the Insurance Study, about 20 percent of
the premium dollars go to loss adjustment expense, or $416
million. In its closed claim study, ISO has estimated that
about 85% of loss adjustment expense is expended for defense
legal costs, or $354 million in terms of this exercise.
Of the $834 million left for claimants and their
attorneys, under Table I, it would appear to be a reasonable
assumption that 30% thereof, or $250 million will go for
claimants' attorneys' fees and other claimants' legal expenses.
Under Table II, $312 million would go for this purpose."
Under Table I there is left $584 million for claimants'
compensation. It would thus appear that, under this table,
claimants' and defense lawyers and adjusters will derive
considerably more compensation from the system than accident
victims (666 million compared to $584 million) and that
claimant and defense legal costs, alone, will exceed
compensation received by accident victims."
Under Table II, combined claimant and defense legal
costs are a bit less than the compensation received by
accident victims ($666 million compared to $728 million) but
the combined legal costs and other loss adjustment expense
almost exactly equals the compensation to be received
ultimately by accident victims ($728 million compared to $728
mill ion) ."
System costs of this magnitude have prompted calls for reform
that are alleged to reduce transaction costs inherent in the tort
litigation system. See pp. VII-279.
PRODUCT LIABILITY UNDERWRITING AND
CLAIMS EXPERIENCE
Introduction
This section reviews the data currently available on
aggregate product liability underwriting and claims experience.
The source of these data is the Insurance Services Office (ISO).
The underwriting figures were developed by ISO on the basis of
reports filed pursuant to the ISO Statistical Plan. The claim
V-25
data consist of the preliminary results of the ISO Closed
Survey .
Claim
Underwriting Experience Data
ISO monoline data on reported and estimated premiums and
losses through 197^ represent less than 40% to 50% of the total
product liability premium written by the industry and are not
necessarily representative of the total product liability
underwriting experience. The underwriting data which are
presented in this section are based on reports on monoline
22
policies by all companies reporting to ISO.
One quarter of the monoline premium is attributable to manual
rated monoline policies and the remaining three-quarters is
attributable to small (a) rated policies. Tables V-14 through V-
17 are based on monoline data.
Table V-14 presents the aggregate premium collected annually
for this group of policies and the incurred losses estimated to
be attributable to these policies. Incurred losses included paid
claims, estimated costs of known claims, and estimated costs of
potential claims (IBNR) as well as estimated expenses. Table V-
15 through V-17 show the breakout of incurred-but-not-reported
(IBNR) losses by bodily injury and property damage combined, and
by bodily injury and property damage separately.
The loss- figures reported in each of the tables should be
clearly understood. They do not represent only claims paid
during the years reported, but rather, they represent calculated
estimates of what amounts ISO projects may ultimately be spent
for each policy year for both payments to claimants and loss
adjustment expenses. The loss figures were calculated by ISO by
applying a loss development factor to the incurred loss figures
submitted by the reporting companies. This is done in the
following fashion. Insurers submit five reports on losses for
each policy year. The first report, which includes paid claims,
reserves for known claims and loss adjustment expenses, but does
not include IBNR estimates, is made 27 months after the beginning
of the policy year for which the report relates. Four subsequent
reports are made annually. A loss development factor is
V-26
determined by comparing the average changes between first reports
and subsequent loss reports in the three most recent policy years
for which data were reported. Similar procedures are used to
determine the estimates for subsequent reports. The factor
currently used to develop incurred losses from the first report
to the fifth report is 1.876. A factor of 1.02 is applied to the
fifth report.
The loss figures reported, particularly those for the most
recent years, may deviate significantly from the actual losses.
Of course, the actual losses for 1973 and 197^, for example, are
not likely to be known with much certainty until 1978 and 1979-
It is possible, however, that the 1973 and 197^ loss estimates
may overly compensate for the apparent underestimation of losses
in the early seventies. During this earlier period significant
upward revisions were made to the early loss estimates. The
causes of the earlier underestimation have not been determined
definitively, although alternative explanations have been
advanced .
Whatever the cause, there is no doubt that abrupt upward
revisions were made. These changes would, of course, be
reflected in the loss development factor used by ISO and its
member companies. Such a reflection would be appropriate if the
changes were indicative of a new loss trend. If, however, it
reflects a singular "catch-up" reaction by insurers, a new trend
may not, in fact, exist. Similarly, given the experience of the
early seventies, it is reasonable to assume that the insurers, in
their own estimates of potential losses, are acting very
conservatively in order to avoid underestimating losses. If such
is the case, the ultimate projections may reflect a redundant
overestimation ; i.e., the overestimation existing in the incurred
losses reported to ISO, multiplied by a loss development factor
which may also overestimate expected losses. It is also possible
that the converse situation may be true. Until a system is fully
developed which permits better evaluation of actual claims and
their trends, it will be difficult to make predictions with
precision. In the absence of better information, it is probable
that conservative assessments of potential losses will continue
in at least the near term.
V-27
In the tables V-1M through V-17, the estimates indicate that
ISO expects losses to ultimately exceed collected premium for
both 1973 and, to a far greater extent, 197^.
The issue of whether or not the estimated losses are
overstated or understated is critical to an analysis of the
product liability situation since the loss figures are used in
the calculation of the loss-and-loss-ad justment ratio from which
ISO evaluates the need for manual rate increases. The ratio is
calculated by applying a "loss trend" factor to the estimated
losses and dividing by the earned premiums at current rate levels
adjusted by the "exposure offset" factor. For the policy year
ending December 31, 1973, the trend factor was 1.753 and the
exposure offset factor 1.17^. These factors would be used to
23
determine rates for policies written in January 1976
The resulting loss-and-loss-ad justment ratio is compared with
the expected loss ratio. The expected loss ratio is currently
0.571. The expected loss ratio represents an estimate of the
percentage of premiums at present manual rates that is required
to pay claims. ISO estimates that 37.9% of the premium is
required for underwriting expenses plus 5% for profit and
contingencies. Thus they suggest that no more than 57.1% of the
premium dollar should go for losses. The loss-and-loss-
adjustment ratio is divided by the expected loss ratio. The
result is the indicated rate level increase.
It is apparent from the above that the primary determinants
of rate increases are estimates of expected losses and changes
therein. In Table V-14 the ratio given for 1973 is 1.107. The
ratio for 197^ is 1.474. These ratios would suggest that further
manual rate increases may be anticipated. Since the figures
include small (a) rates as well, these might be expected to also
be increased. If the expected loss ratio of 0.571 and the 1974
loss-and-loss-ad justment ratio of 1.474 were used as determinants
of the necessary 1977 premium rates, those rates would be 258% of
the 1974 rates.
V-28
Claims Experience
Introduction
Until recently no aggregate data on product liability claims
have been available. Although commentators have suggested that
there have been "dramatic increases" in the number and cost of
product liability claims, no direct evidence has been available
to either support or refute the contention. In 1976 the
Insurance Services Office, with the cooperation of its member and
subscribing companies, sought to remedy this lack of data and
undertook a major closed claim survey which sought to collect
data on all product liability claims closed between July 1, 1976
and March 15, 1977. The final results of this survey, which are
not yet available, should be of real value to insurers and others
interested in product liability. This section focuses on the
preliminary report of the survey which was published in December
1976.
The Preliminary Report on the ISO
Closed Claim Survey
The preliminary analysis
jrus—CLLosed and reported to
was based on approximately 7,800
_ ISO between July 1, 1976 and
November 1, 1976. The results are useful to the extent that they
give some indications of the type of data which may be
anticipated in the final report, but they are not necessarily
representative of overall claims experience.
Several problems are apparent in the preliminary report which
will, hopefully, be overcome in the final report. These problems
include the following:
Trend ing . ISO chose to apply a trend factor to certain of
the payments reported. Although ISO has made both trended and
untrended data available, its analysis of the preliminary results
relies on the trended data. Briefly stated, ISO's method of
trending is to translate the incident data of each closed claim
to July 1, 1976 and multiply all cost data on each claim by a
selected annual factor. The effect of the trending is to adjust
the costs so as to estimate what each claim might cost if it
occurred in July 1976 and was closed sometime in the future.
V-29
Thus , a claim which had a six-year lag between occurrence and
closing would be adjusted so that the trended cost would reflect
ISO's estimate of what it would cost if closed in 1984.
In a review of ISO's trending, Howard B. Clark of the Federal
Insurance Administration observed:
". . .Inasmuch as the normal function of trending is
ratemaking, which is clearly not the purpose of the closed
claims study, there are those who will question the wisdom or
propriety of trending incident to this exercise. . ."
In explaining its use of trended data, ISO has said:
"This allows us to examine what would happen if all incidents
in the survey occurred in the same year." Since, manifestly,
the incidents surveyed did not all occur in the same year,
the purpose of the exercise remains obscure. Moreover, ISO
has warned that: "The nature of a closed claim survey is
such that it provides a truly accurate picture of only the
past environment" (p. 12 Closed Claim Survey). In addition,
ISO has cautioned: "It is possible that an incident from 1965
would not have occurred in 1976 due to changes in the legal
environment, social attitudes, business expectations,
government, etc. Conversely, many of the kinds of incidents
which are generating claims today may not have occurred or
generated claims several years ago." In the light of these
cogent ISO caveats, it is difficult to descry either the
purpose or the worth of the trended data ."
When completed, the ISO Closed Claim Survey should provide a
description of the claims closed during the period for which the
data were collected from the participating companies. The
untrended data will describe the distributions of claims by
product classes, types of claims, status of injured parties,
sizes of payments, etc. for those claims actually closed. Use of
the trended data to describe such distributions would be
inappropriate .
Representativeness of the ISO Sample . --Whether or not the
underwriting practices and claims settlement procedures of the
twenty-three participating insurance firms are representative of
those of the industry as a whole is not known. It is also not
V-30
known what fraction of the total product liability premium was
written by the twenty-three during the period when the closed
claims were initiated, nor is it known what fraction of the total
losses incurred was incurred by them during the period. These
unknowns severely limit the statistical reliability of the data
and the validity of generalizations which can be drawn from them.
The results presented in the Preliminary Report have two
further deficiencies as indicated by the following statements in
that report:
". . .the number of forms available at this point does
not provide a sufficiently large base to yield a truly
representative picture of claims closing today. . ."
". . .one participating company opted to complete forms
for all product claims in July, but for claims closed after
July 31 , only those which received payment greater than
$1,000 were submitted to ISO. In this preliminary analysis
that company has been included in all reports. It is our
intention to run future reports both with and without that
25
company's data. . ."
The preliminary results reported by ISO in its December
report attempt to give indications of such information as:
• the products generating the most payment dollars
• the status of injured party receiving payment
• time intervals in the claims process
Tables V-18 and V-19 compare the trended and untrended
results of data processed by ISO through November 1976 for
products generating the most payment dollars for bodily injury
and for property damage. It is apparent that the ISO trending
method shifts the percentages attributable to products and party
status and inflates the amounts of payments as well. In Table V-
18 the effect of trending on the one claim paid for a bodily
injury caused by a "laundry centrifugal extractor" is to increase
the actual payment of $195,000 to a projected payment of
$1,^5^,700. In the same table, the percentage of payments
attributable to "chemicals" was changed from an actual 1.9 to 5.6
by the trending.
V-31
Table V-20 shows the time distributions involved between the
occurrence and the reporting of the claims. Table V-21 indicates
the time distributions between the occurrence and the closing of
the claims.
Table V-22 compares the trended and untrended results of the
preliminary processing by ISO on the distribution of product
liability claims by the status of the injured party in the
occurrence resulting in the claim. ISO's trending of the data
increases the percent of total payment and inflates significantly
the average of non-zero payments for both bodily injury and
property damage attributable to those whose status is "non-
purchaser, user or consumer."
Table V-23 indicates the distribution of claims closed at
various stages of the legal system. The payment averages are for
all non-zero payments. For example, of the 165 bodily injury
claims which ISO reports as going to a court verdict only 39 were
awarded payment. If the total amount attributable to court
verdicts were divided by the number of claimants who obtained
payment as well as those who didn't, the average cost per claim
of claims going to a court verdict would be $11,473 in payment
and $7,441 in allocated loss adjustment expense, a total of
$18,914 per claim. If the same calculations were performed on
the 40 claims for which settlement was reached during trial but
before a court verdict, the figures would be $29,665 average
payment plus $12,136 for a total of $41,801 or 2.2 times the
average cost of those obtained from a verdict.
The foregoing discussion and tables have been presented for
illustrative purposes. It should be noted that while the data
presented may be representative of the experience of 23 companies
during the reporting period, there is considerable question about
whether they represent more than these companies. As was noted
26
earl ier
one company, Liberty Mutual, submitted complete
reports for only one month after which they submitted only paid
claims closed with payments in excess over $1,000 dollars
Table V-24 indicates the total number of bodily injury claims
paid by Liberty Mutual in 1976. The average payment is stated to
be $2,105. Given the large volume of claims handled by this
company in the $1,000 to $5,000 payment range, it is reasonable
to assume that the inclusion of these claims in the ISO Closed
V-32
Claim Study might have significantly affected the results. It
should also be noted that the table includes only the number of
paid claims leading one to infer that there must be a significant
number of claims for which payment was not made which were also
excluded from the Closed Claim Survey.
Conclusion
Several conclusions can be drawn from the preceding
discussion. As regards the underwriting data presented two
general comments apply. First, insofar as the aggregate product
liability premium is unknown, it seems appropriate that means of
obtaining these data be explored. One means to accomplish this
would be to require that product liability experience be broken
out and reported as a separate item on the financial reports
filed annually with Insurance Commissioners. The second comment
relates to the manner in which losses are estimated and rate
increases are projected. The current methodology is imprecise
and may be subject to significant error. The primary means which
could be utilized to correct these deficiencies would be the
annual collection of data on all product claims. The Closed
Claim Survey conducted by ISO clearly demonstrates that the data
can be collected. If the deficiencies in the existing survey
could be overcome, primarily by encouraging or mandating all
companies to submit data on all claims, and if the survey were
done on a continuous basis, the examination of changes in
untrended data would provide a strong basis for future decisions
by insurers and their regulators.
THE FINANCIAL SITUATION IN THE PROPERTY-CASUALTY
INSURANCE INDUSTRY
Introduction
This section attempts to determine how the financial
condition of product liability insurers in the past several years
has influenced the rate at which premiums have risen. To do
this, it would be appropriate to examine the financial indicators
of product liability insurance as a separate line as well as
indicators for broader categories of insurance which include
product liability insurance. This would permit comparisons with
other lines within the broader categories and would allow direct
V-33
inferences concerning product liability premiums. However, since
product liability experience is not reported separately, only the
overall results for the property-casualty insurance industry and
the financial indicators for miscellaneous liability insurance, a
line of the property-casualty insurance industry that includes
product liability insurance, are analyzed.
The financial data analyzed are those reported by the
insurance companies and the insurance trade press. Among the
sources used are the Annual Reports filed with the District of
Columbia Insurance Department by the top 10 writers for
miscellaneous liability insurance (on the basis of total premiums
written). The primary indicators used in this discussion are
the "combined loss and expense ratio" and the "premium to surplus
ratio." The former is considered indicative of the relative
underwriting profit or loss. The latter is considered indicative
of capacity, that is, the ability to underwrite additional risks.
Because of insurance accounting conventions, and the fact that
certain of the amounts reported as losses are estimates, these
ratios may not reflect the actual financial situation. They are
useful, however, to identify relative changes from year to year,
and as indicators of the perceptions of carriers regarding their
standing in the industry.
Reserving practices affect both financial indicators and
premium levels. They are reviewed prior to the discussion of the
financial indicators and their implications for products
liabil ity .
Reserving Practices
Amounts set
ponent of what i
recent policy
reserves for cla
amount of repo
financial indica
V-26. It is
represent actual
expected claim
the amount repor
aside in loss reserves constitute a major com-
s reported as "incurred losses" for the most
year. (Incurred losses include claims paid,
ims and loss adjustment expenses.) The total
rted "incurred losses" significantly affects the
tors, as well as premium rates as was noted on p.
important to note that loss reserves do not
expenditures, but rather, are estimates of
costs for the period. Thus, the relationship of
ted as "incurred losses" to ultimate costs is
V-3^
only as good as the
reserving practices.
estimates of these costs; that is, the
As discussed earlier, two categories of loss reserves exist;
those which are established to cover the cost of known claims,
and those established to cover the cost of potential claims; the
incurred-but-not-reported (IBNR) claims.
The Task Force staff analyzed the incurred losses of the 10
leading insurance companies writing miscellaneous liability
insurance. For these companies, incurred-but-not-reported losses
were 39.2% of total incurred losses for miscellaneous liability
in 1975 and 42.1% in 1976. IBNR loss percentages for the
individual companies ranged from 16.1% and 26.2% for the two
lowest to 51.0% and 55.8% for the two highest in 1975. The 1976
range was from 19.5% and 34.8% for the two lowest to 50.8% for
the two highest. Incurred-but-not-reported losses were not
broken out separately on the Annual Statements until 1975.
Whether the product liability portion of the miscellaneous
liability line for these companies exhibit a higher or lower
incurred-but-not-reported fraction in 1975 and 1976 than the
whole line is unknown.
The primary insight that can be gained from the analysis is
provided by examining annual changes made in estimates for
incurred losses for a given year. In general, the estimates were
revised upward through 1976. Table V-25 indicates the annual
changes made in incurred loss estimates by the 10 companies
between 1972 and 1976. These changes are necessitated because
incurred losses, including incurred-but-not-reported losses, for
any given year are estimates. As the loss experience for a given
year "matures" in subsequent years, losses become known with more
precision. In the 1976 annual statements, revisions of incurred
loss estimates through 1976 are given for the earlier years in
which losses were incurred.
It is apparent from the data that reported total incurred
losses in the miscellaneous line have increased significantly
over the past few years. While these increases have resulted in
underwriting losses and have led to increased premiums, it is not
possible to determine the overall percent attributable to product
liability. Nor is it possible to determine whether the total
V-35
incurred losses are overestimated or underestimated as a result
of reserving practices which may be based on inaccurate estimates
of the numbers and costs of individual claims. Insofar as
companies employ differing reserving practices and insofar as
estimating reserves (particularly IBNR) is an imprecise art
which, at least for product liability, lacks a good data base, it
is reasonable to assume that the amounts reported as total
incurred losses are imprecise.
Unresolved Issues in Reserving Practices
The precise impact of reserves for incurred losses, including
incurred-but-not-reported (IBNR) losses, on product liability
underwriting losses, rates, and the determination of the
profitability of the line is still unresolved.
Similarly, the Task Force staff has not been able to directly
address the issue of whether or not the unpredictability inherent
in the reparations and insurance system lends itself to a
continuing redundancy in the reserves. The entire area of
reserving practices is one that has been the subject of
considerable debate which appears certain to continue. It is an
area in which there is a vital need for more objective study.
Overall Property-Casualty Experience
Property-casualty insurance includes miscellaneous liability,
workers' compensation, automobile and other lines. Miscellaneous
liability premiums in 1976 represented $5.2 billion of the $59.5
billion property-casualty premium.
One of the reported reasons for the difficulty in obtaining
product liability insurance is the lack of capacity for writing
new business in the property-casualty insurance industry. One
measure of capacity used by insurers is the written premium-to-
pol icyholder-sur pi us ratio. When this ratio is high, insurance
companies become more conservative in selecting the risks they
will insure. Product liability is one of the lines where risks
(exposures) are believed to be bigh and companies are selective
in writing additional accounts.
V-36
Policyholder surplus is the amount remaining after all
liabilities are deducted from assets and includes such sums as
paid-in-capital and special voluntary reserves.
The rationale behind the premium-to-surplus measure is as
follows: Policyholder surplus is viewed as a contingent reserve
which could be used to cover unanticipated losses. Premiums are
viewed as a surrogate for exposure and therefore potential
liabilities. If premiums overstate or understate this exposure,
actual capacity will be misrepresented.
The aggregate premium to policyholder surplus ratio for the
property casualty insurance industry increased sharply between
1973 and 1974 and remained essentially constant at the high level
in 1974, 1975 and 1976. It should be noted that an increase in
premium rates will itself decrease insurance capacity for the
short term. The reason for this is twofold. First, the rate
increase raises the premiums-written portion of the ratio.
Additionally, the immediate effect will be to increase the
insurers' unearned premium reserve liability (in insurance
accounting this is an actual, not contingent liability) thus
impacting the policyholder surplus portion of the ratio.
The premium-to-surplus ratios shown below are based on
information gathered from the Insurance Information Institute and
A.M. Best Company. The premium-to-surplus ratios for the
property-casualty insurance industry from 1971 to 1976 are as
follows :
1971
1972
1973
1.83-to-1
1.65-to-1
1.96-to-1
1974:
2.76-to-1
1975:
2.53-to-1
1976:
2.57-to-1
Other indicators of the financial condition of the overall
property-casualty insurance industry are to be found in Table V-
26 which summarizes estimates of the financial operating results
of the industry.
The industry has reported substantial statutory underwriting
losses over the past few years. Statutory underwriting losses
were $2.12 billion in 1974, $3.63 billion in 1975 and $1.67
billion in 1976. As noted in the August 29, 1977, Executive
V-37
Letter of the Insurance Information Institute, data reported to
the California Insurance Department on Fire, Casualty and Allied
Lines indicate an underwriting profit of $123 million in the 12
months preceding June 30, 1977. (The reporting companies write
about 90% of the total property-casualty insurance written
nationwide.) This would indicate a net underwriting profit for
the property-casualty insurance in industry in 1977. The
statutory underwriting gain (or loss) is determined by the
differences between earned premium and the sum of incurred losses
and expenses for a given year. As noted previously, incurred
losses include the actual costs and anticipated costs of claims
reported as well as the costs of anticipated incurred-but-not-
reported losses. The use of only earned premium in determining
underwriting losses tends to underestimate the income position,
particularly in light of the fact that the prepaid expenses
referable to commissions and other acquisition costs (and which,
therefore, could logically be amortized over the policy periods)
are chargeable in full against income as represented by earned
premiums. Although this may well afford a very useful "acid
test" for gauging the solvency or solidity of insurers, its
utility otherwise is questionable.
The combined-loss-and-expense-ratio is an indicator of the
relative underwriting profit or loss. This ratio is determined
by combining the loss ratio and the expense ratio. The loss
ratio is the quotient resulting from dividing incurred losses by
earned premiums. The expense ratio is the quotient resulting
from dividing incurred expenses by either earned or written
30 K J
premiums . A combined ratio of less than 100 indicates an
underwriting profit whereas a combined ratio over 100 indicates
an underwriting loss. This indicator has improved substantially
from 1975 to 1976, dropping from 107.9 to 102.8.
Net investment gains made it possible for the industry to
have net income of $1.2 billion in 1974, $0.6 billion in 1975 and
$2.65 billion in 1976. However, these profits were substantially
lower than in the previous three years.
In retrospect, it can be argued that the underwriting profits
in 1971 and 1972 were overstated. Reserves that had been
initially set up to cover claims filed prior to 1973 were later
considered to be inadequate. Underwriting results were
V-38
considered poor in 1973 and turned into reported underwriting
losses in 197^. Increased competition and rate cutting appear to
have been factors in this development, as well as the high rate
of inflation and some extraordinary
31
occurred during this period
natural catastrophes which
The underwriting losses in 1975 can be attributed, at least
in part, to a delayed reaction to the erosion of reserves
established in prior years. According to Standard & Poor's
Industry Surveys, if it had not been necessary for many companies
to bolster their reserves for unsettled claims carried over from
prior years, a turn in underwriting margins would probably have
occurred by early 1975 . The improvement in underwriting results
noted in 1976 may be attributed both to the improved condition of
reserves and the effects of rate increases in late 1974 and 1975.
Most property-casualty insurers remained profitable during
the 1971-76 period in spite of the unsatisfactory underwriting
experience during the latter part of the period. This condition
is attributable to investment income as well as to tax credits on
the underwriting losses. Investment income of property-casualty
companies is usually the primary source of net earnings. Unlike
life insurance where a large portion of investment income is paid
out in policyholder benefits, investment income of property-
casualty companies is carried straight to earnings . In
contrast to the volatile nature of underwriting income,
investment income has grown at a steady rate during the last 10
years. Between 1971 and 1975, investment income of stock
property-casualty companies grew from $1.8 billion to $3.1
billion . For 1976, investment income is expected to be even
higher than for 1975 when all the reports are in.
Miscellaneous Liability Experience
Table V-27 compares aggregate premium for the total property-
casualty industry with those of the miscellaneous line.
Overall miscellaneous combined-loss ratios are compared with
overall property-casualty underwriting combined-loss ratios in
Table V-28. The miscellaneous liability data are taken from
Best's Insurance News Digest, Property/Casualty Edition, January
V-39
3, 1977. Figures for 1976 miscellaneous experience are estimates
made by A. M. Best.
These figures indicate that miscellaneous insurance premium
volume has more than doubled since 1972. However, when viewed as
a percentage of aggregate premium for the industry, its share
increased only from 6.4% in 1972 to 8.7% in 1976.
The combined ratios seem to indicate that statutory
underwriting losses have been greater within the miscellaneous
line than in the total industry. On the other hand, it would
likewise seem that the investment income allocable to this line,
characterized by slow pay-out and long-standing reserves should
be greater than for lines without those characteristics.
The substantial improvement in the combined ratio for
miscellaneous liability in 1976 is largely due to large increases
in aggregate premiums. Observation of the loss ratios would
indicate that the underwriting results in the industry are
greatly improved.
The overall comparison of the experience of the 10 leading
companies with the total miscellaneous liability line is shown in
Table V-29. In the 1972 to 1974 period, the loss ratios were
worse for the 10 companies than for the total line, but they
showed more rapid improvement in 1975 and 1976. For the 10
leading companies, the ranges of loss ratios for 1972 through
1976 are given in Table V-30. It appears from this limited
analysis that statements concerning statutory underwriting
experience for miscellaneous liability would have to allow for
the fact that such experience of some insurers is decidely better
than of others. Moreover, the income from investments
attributable to funds supplied by policyholders must always form
a backdrop for such statements.
The Implications of the Financial Trends for
Product Liability Insurance Costs
and Availability
Although the overall underwriting results have shown
significant improvement recently, there is no reason to believe
that the situation is likely to improve for those manufacturers
V-4 0
and suppliers who have been unable to purchase sufficient product
liability insurance or who have been affected by severe premium
increases. To the extent that insurers perceive that claims for
high risk products were major contributing factors in the
underwriting losses recently experienced, it seems reasonable to
assume that they would prefer to emphasize coverage of low risk
products. Thus, coverage is unlikely to be available widely for
the small- and medium-size manufacturers of a single product that
is deemed to be a high risk, or for other small or medium
manufacturers for which high risk products are most of the
production. For those manufacturers who produce a mix of some
high risk products but a larger proportion of low risk products,
coverage will probably be available and affordable. This is
because insurers will probably be willing to write high risk
products coverage as part of a package for which the total
premium is relatively large. Even though the price of the high
risk portion of the coverage may be high, the financial impact on
the insured may be dampened since the total premium as a
percentage of gross sales will be reduced by including the price
of coverage for low risk products.
The poor financial results were responsible for a substantial
part of the subsequent premium increases. However, the poor
financial results could have been due to over estimations of
losses. Whether the rates were too low or the loss estimates too
high will not be known definitively for some time. Based on
miscellaneous liability current financial results, particularly
for those companies experiencing high loss ratios, it is likely
that premium^levels for product liability will increase in The
near future. ~ ~ " "
REINSURANCE AND SURPLUS LINES INSURANCE
Introduction
This section focuses on the role of reinsurance and surplus
lines insurance in the product liability market. Insofar as both
reinsurance and surplus lines are essentially unregulated, it is
difficult, if not impossible, to obtain sufficient data to
definitively evaluate their capacity to provide coverage;
nonetheless, this section attempts to identify the role of each
V-^1
and the impacts they
availability and cost.
may have on product liability insurance
Surplus Lines Insurance
Characteristics of Surplus Lines Insurance
and Coverage Trends
Surplus lines insurers are, by definition, those insurers
which are not admitted to write regular insurance business in the
states in which the insurance is sold. These nonadmitted
insurers emerged many years ago as a supplement to the
traditional market. Their purpose has been to write the coverage
and limits that the admitted companies, (companies licensed to do
business in the policyholder's state) cannot absorb. These
nonadmitted insurers have also gained a reputation for writing
unique and unusual forms of coverage. However, as these
coverages become better known and the loss costs become more
predictable, admitted insurers tend to "take over" the market for
these coverages. This is not particularly difficult as the
surplus lines laws that regulate the affairs of nonadmitted
insurers generally require that coverage written by these
insurers first be refused by admitted companies.
Another significant characteristic of the surplus lines
market is that surplus lines insurers are often prohibited from
charging a lower rate than that available from licensed insurers.
Thus, coverage available from these companies is often offered at
a multiple of the premium charged by admitted insurers. Surplus
lines insurers can charge these higher premiums as their
policyholders have exposure which normally cannot be absorbed by
admitted insurers; thus, if they want coverage, they must pay the
premiums the surplus lines insurers want.
The consequence of this pricing practice is that business
/flows to the surplus lines markets during periods when primary
■J
insurers are cutting back their writings or avoiding certain
classes of risks. Thus, in 1975, the surplus lines markets
reportedly absorbed large increments of medical malpractice
coverage
V-42
Table V-31 shows the amount of all lines premium written by
surplus lines companies during the four-year period between 1972
and 1975. Premium volume increased 51% between 197^ and 1975 to
$612.8 million following increases of only 7.8% between 1972 and
1973 and 16.3% between 1973 and 197^. Premiums are further
estimated to have increased substantially between 1975 and 1976.
Regulation of Surplus Companies
Each state has passed a surplus lines law, however, they vary
in detail. Generally, these laws place the primary regulatory
burden upon the surplus lines broker. Usually, a broker who
wants or needs to do business with a nonadmitted insurer must
first have a special license. Since the broker is responsible
for payment of the premium tax (a duty normally performed by the
admitted insurer), the broker usually posts a bond guaranteeing
payment. Non-U. S. based surplus lines insurers (called alien
insurers) such as Lloyds of London must meet specific trust fund
requirements set by the surplus lines statutes in some states and
must be on the insurance commissioner's "approved" list of
insurers in other states. Another distinctive surplus lines
regulatory feature is that surplus lines brokers must file
affidavits within a prescribed time period, such as 30 days after
procuring coverage. These documents usually state placement was
not made for a lower rate than that available from admitted
insurers .
Several state insurance departments were contacted by the
insurance contractor requesting information on the impact of
surplus lines insurance on the product liability market. The
state regulators commented that they believed that there has been
a sharp increase in the involvement of surplus lines carriers in
product liability business in 1976. and that this involvement
will undoubtedly increase in 1977 .
Reinsurance
Characteristics of Reinsurance and Coverage Trends
Ther,e are basically two types^_oX. reinsurance--treaty and
facultaitrye . Treaty reTnsur^"nce covers an entire line of
insurance whereas facultative reinsurance covers only a specific
V-43
risk. Facultative reinsurance is particularly relevant to this
discussion since it is ordinarily used in those cases where a
risk is too large for a primary insurer to wish to assume it
alone or where the risk is both large and subject to substantial
uncertainty. Facultative reinsurance is a means by which the
primary insurer can share the risk on a particular policy. In
effect, the primary insurer purchases insurance (facultative
reinsurance) to provide indemnification against certain losses.
The Insurance Study indicates there is a trend toward more
reinsurance for products liability. It concludes:
". . .During our interviews with reinsurers, we learned
that their volume of facultative business trends to increase
whenever their customers (the insurers) are particularly
worried about a given line of business or class of risk.
Thus, during 1975, they wrote a large volume of facultative
medical malpractice coverage. In previous years, aircraft
products and pharmaceutical risks passed through similar
phases. As the loss-cost patterns become more stable,
insurers write these exposures more willingly and the
reinsurers see a drop in the demand for their risk-bearing
capacity. . ."
". . .Although our underwriting file reviews showed
facultative reinsurance on only 5% of the policies reviewed,
several of the reinsurers we interviewed indicated that they
are writing far more product liability coverage today than 5
years ago. This coverage is being written primarily by the
traditional treaty method (reinsurance for an entire line of
business--e .g . , miscellaneous liability), but an increasing
amount is being written through facultative arrangements ."
One of the major practical differences between treaty and
facultative reinsurance is that facultative reinsurance is more
cumbersome and expensive than treaty reinsurance. Whereas any
underlying policy coming within the scope of a reinsurance treaty
is automatically covered by reinsurance, the primary insurer must
take care to see that a policy upon which facultative reinsurance
is necessary or desired is reinsured and that the proper amount
of the premium is assigned to the reinsurer. The home office or
branch office copy of the face of the policy (the "daily report")
V-44
must be suitably noted with respect to the nature and amount of
the reinsurance and such reinsurance must be taken into account
in the handling and payment of claims. The handling of
facultative premiums and losses is likely to involve greater
detail and expense than treaty reinsurance. All of these would
appear to add up to higher cost for facultative reinsurance and
higher underlying premiums to support the greater cost of
facultative reinsurance.
Table V-3? indicates reinsurance premium volume for American
reinsurance firms. The table includes both treaty and
facultative reinsurance.
Product Liability Reinsurance Premiums
Total reinsurance premiums for product liability can only be
roughly estimated because the reinsurance premium figures are
typically attributed to a range of liability exposures. However,
the Reinsurance Association of America estimates that total
products liability reinsurance premiums probably range between
$200 million to $300 million annually (1976 estimates). They
further estimate that ^5% to 20% of all liability policies with
products coverage are currently reinsured by treaty or
facultative arrangements.
The Federal Insurance Administration estimates the
reinsurance portion of the total miscellaneous liabilities line
at $288 million in earned premiums in 1975. If this estimate is
accurate, the Reinsurance Association of America estimates are
high. That is, product liability reinsurance premiums in 1976
might be $200 million or even less.
Regulation of Reinsurance
Although a few states recognize only reinsurance provided by
a reinsurer licensed or approved as a reinsurer, in most
instances the state insurance regulatory authority has little
hold over the foreign (i.e., out of state) or alien (i.e., out of
country) reinsurer. Consequently reinsurance, whether
facultative or treaty, is subject to little regulation at the
state level and to no rate regulation at all, even in theory.
The statutory criteria contained in state rate regulatory laws
V-U5
which prescribe rates that are adequate, not excessive, and not
unfairly discriminatory do not apply to reinsurance.
Reinsurers establish their own incurred-but-not-reported
reserves and reflect these reserves in their rate structures.
Since the incurred-but-not-reported reserves of the primary
insurer are bulk reserves not placed upon the individual cases
(and thus not allocated ratably to the excess reinsurer), there
would appear to be some danger of redundancy in reserves
resulting from the cumulative effect of the respective incurred-
but-not-reported reserves, both of which are taken into
consideration in the structuring of rates.
Remote though the original insured may be from the reinsurer
in terms of contractual privity or relationship, it is evident
that the reinsurance transaction wields a pervasive influence
upon the underlying insurance transaction.
Inasmuch as the reinsurance contract is purely one of
indemnity, if the primary insurer were to become insolvent and
incapable of paying the losses, the reinsurer would escape since
there would be no loss to indemnity. It is for this reason that
the states, through statute or regulation, refuse recognition of
any reinsurance which does not contain an insolvency clause to
the effect that the reinsurance shall not become invalidated or
uncollectible because of the insolvency of the ceding insurer but
shall become payable to the receiver, rehabil itator , or
liquidator of such insurer.
Impact of Reinsurance and Surplus Line Trends
on Product Liability Insurance
On the basis of the foregoing it seems apparent that, at
least to some extent, surplus lines carriers and facultative
reinsurance seem to be having a positive impact on the
availability of product liability insurance but, on the other
hand, both are likely to significantly increase the cost of such
coverage for the manufacturer or supplier who must obtain surplus
lines coverage or whose policy is covered by facultative
reinsurance. Moreover, the fact that policyholders and claimants
will not, in many instances, receive protection from state
V-46
solvency guaranty mechanisms should be a matter of concern to
insurance regulators.
CONCLUSIONS
This section focuses on the major analytic conclusions
derived from the examination of the product liability insurance
system and presented in the preceding sections, and provides
certain conclusions regarding the manner in which the system
might be adapted to more adequately achieve its objectives. The
most apparent finding, and one which permeates each of the
preceding sections, is that data, specific to product liability,
are lacking." So long as products coverage was percefv^ed by each
o^f^the parties--claimants , insurers and product manufacturers and
suppliers as stable and functional, and so long as each objective
was perceived as being met, the need for specific data was
neither apparent nor, perhaps, would the cost of attaining them
have been justified.
As the preceding sections indicate, however, serious
conflicts have arisen among the parties involved and significant
economic impacts have been felt, particularly in specific
industry sectors. In particular, insurers contend that the costs
of claims are rising dramatically and that premium increases have
been essential in order to maintain sufficient funding to pay
claimants and claim costs as well as to secure a profit.
Manufacturers and suppliers content, on the other hand, that
premium costs are unreasonably high. Currently there are
insufficient data to adequately assess the relationships between
premiums and claims. The data that are available indicate
clearly that premium increases have been relatively substantial,
and that certain industry sectors and certain types of firms have
been particularly affected but it is impossible to determine
whether or not the situation is a necessary response to claims
experience.
In view of the volatility and uncertainty currently existing
it appears that certain actions should be considered by the
insurance companies, insurance regulators and policymakers in
order to increase certainty and confidence in the operation of
the product liability insurance system. The conclusions reached
V-47
involve data collection, ratemaking and regulation and financial
disclosure and accountability.
Better Data Should Be Collected For All Product Liability
Insurance Premiums , Losses and Claims .
Premium, loss and claim data should be collected in a manner
that is as statistically sound and reliable as possible for
ratemaking and other purposes. Data on all product claims, such
as were sought in ISO's Closed Claim Survey, should be collected
on a continuous basis and untrended results should be published
annually. Data should be collected from all insurers.
The improved data base is an essential first step in the
solution of product liability problems. In and of itself it will
permit examination of actual trends in product liability. Many
of the problems which have arisen in product liability seem to be
attributable to a lack of actual data, and to a significant
amount of factually unsubstantiated rhetoric. Much has been made
of the allegation that "one million product liability claims were
filed in 1976," yet ISO's Closed Claim Survey seems to indicate
that the actual number of total claims was considerably less than
100,000. Similarly, ISO data indicate that the average payment
was less than $20,000. These figures are significantly lower
than those which had been claimed by some. The availability of
actual data will provide a considerably greater degree of
certainty than currently exists and should considerably improve
the decision making ability of insurers and others.
The improved data base is also essential to the
implementation of the other suggestions made in this section,
particularly those related to ratemaking and its regulation.
Product liabil ity insurance rates and premiums should be more
closely related to statistical assessments of product risk .
The improved data base and the availability of actual data on
trends in product liability claims could permit product liability
rates and premiums to be more closely established on a basis more
commensurate with actual product risk. As has been noted in this
Chapter, rates for most risks are based on subjective estimations
of anticipated loss costs. Consequently, it is not currently
V-48
possible to draw direct correlations between premiums and product
risk and significant unexplained differentials exist among
premiums charged firms producing similar products. The
preliminary ISO Closed Claim Survey indicates that it is possible
to collect data on all claims, but the results also indicate that
collecting sufficient data for ratemaking purposes for some
product classes may be very difficult. To overcome this problem,
consideration should be given to expanding those product classes
where experience is generated slowly. New classes could be made
up of as many products with similar risk characteristics as
necessary to assure that enough claims to provide a statistically
reliable ratemaking base would be reported annually. Insurers
should utilize this data in developing premiums that are related
to product risk.
Product liability insurance rates and premiums should be
monitored to ensure that they are fair , nondiscriminatory and
reasonably related to product risk.
Insurance regulators are empowered to monitor and review
insurance rates and premiums to ensure that they are fair and
nondiscriminatory. In the area of product liability insurance,
consideration should be given to targeting review to those rate
increases which exceed a threshold amount. Such a procedure
would focus regulatory attention on those rates and premiums
which have the most significant adverse effect on business. Such
regulation could also promote greater uniformity among rates
charged by an insurer to firms producing products with similar
risks .
Since insurance regulation is currently undertaken only at a
state level, it is essential that the state regulators have
access to a data base which includes nationwide experience on all
product liability claims. Regulators need such a data base in
order to evaluate rate requests effectively.
There is a need to promote greater financial disclosure and
accountabil ity in product liabil ity insurance
It would be constructive if a system were devised whereby
insurers would report all product liability experience as a
V-49
separate line on the Annual Report filed with the State Insurance
Departments. This would permit examination of aggregate product
liability experience of insurers. Additionally, it would appear
to be in both the insurers' and the public interest for insurers
to provide information which would enable regulators and others
to get a more accurate assessment of the insurers' complete
financial situation regarding claims and reserves. Accounting
procedures established to evaluate solvency are clearly
appropriate for that purpose but insurers should also report on a
basis that assumes continuation and takes into account as assets
such items as the unearned premium reserve. In a line such as
product liability, where there is a relatively long period
between the occurrence and ultimate closing of some large claims,
direct account of the investment income attributable to the
established reserves should be made.
Further Studies Should Be Undertaken
Studies should be conducted on reserving practices, including
evaluation of methods of estimating reserves; the disposition of
the excess of reserves that are not ultimately paid to claimants
and related claims expenditures; and the appropriateness of
existing loss development and trend factors.
The adoption of the measures suggested above should lend
greater certainty to the product liability insurance situation
and assist insurers in more adequately meeting the system
objectives. Additionally, the adoption of such measures will
permit evaluation of whether the uncertainty and lack of data
have themselves led to premium increases which may ultimately be
determined not to have been necessary or whether the actual
claims experience fully justifies them and perhaps even requires
further increases.
In conclusion the Task Force believes that steps outlined
herein will help address one of the causes of the product
liability problem. They might also reduce pressure for extensive
government involvement in the area of product liability insurance
regulation .
V-50
NOTES TO PRODUCT LIABILITY INSURANCE SYSTEM
"■see Chapter VI and VII.
^The ability to underwrite additional risks.
^Throughout this
the insured and the
primary policy and
insurer. This termin
company dealing dir
and administering cla
(the primary policy
insurer may have made
relate to the prim
party.
Damages covered
damage (PD) .
chapter the insurance contract agreed to by
insuring company is referred to as the
the insurer is referred as the primary
ology is used to differentiate between the
ectly with the insured (the primary insurer)
ims under the policy provided to the insured
) and those insurers with whom the primary
indemnification or other agreements which
ary policy but to which the insured is not a
include both bodily injury (BI) and property
-'Some sources refer to this type of coverage as "discovery"
basis policies. See Zarpos v. Morrow, 215 F. Supp. 887 (D.N.J. ,
1963).
Potential claims
time in the future.
which insurers assume will be made some
'''The c
the risk at
the scope
proposed ri
retention;
treaty; wh
j eopardize
other profi
much , f acu
and discuss
Chapter .
onsider
all in
of th
sks fit
whethe
ether ,
the t
t shari
1 tative
ion of
ation
volve
is d
s wi
r th
even
reaty
ng ar
rei
facul
of whe
s some
iscussi
thin t
e risk
if n
or the
rangeme
nsuranc
tative
ther or not
technical fa
on. Such fa
he company'
is exclud
ot excluded
sliding sea
nts under it
e may be ob
reinsurance
the insu
ctors wh
ctors in
s philo
ed from
, it m
le cedin
, and wh
tained .
see Sect
rer wi
ich ar
elude
sophy
the re
ight
g comm
ether ,
For d
ion G
11 a
e b
wher
of
insu
tend
issi
and
ef in
of
ccept
eyond
e the
risk
ranee
to
on or
how
ition
this
o
°As used throughout this discussion the word "rate" refers to
the "amount charged per unit of exposure," and, unless otherwise
noted, the use of the work "rate" implies neither derivation from
a statistical valid experience data base nor regulatory approval.
^The factual information on the rating methods is based on
information from the ISO publication. Product Liability Insurance
Background Report, Dec. 1976.
1 0
Monoline coverage is that which is written specifically for
one type of liability; e.g. product liability; as opposed to
multiline policies which combine different types of coverages.
V-51
1 1
Composite rating, as well as Loss rating and Large (a)
Rating are used for coverage for very large firms. The basic
policies are either monoline or multiline but the rating methods
differ from those of smaller firms.
1 2
ISO, Product Liability Insurance Background Report, Dec.
1976 p. 7.
1 "^
-■Questions propounded to insurance companies on June 2,
1977, by the Honorable John LaFalce, Chairman of the Subcommittee
on Capital Investment and Business Opportunities of the U.S.
House of Representatives Committee on Small Business. Company
responses were from: Aetna Life & Casualty, Crum & Forster
Insurance Companies, the Hartford Insurance Group, the St. Paul
Fire and Marine Insurance Company, the Continental Insurance
Companies, and Liberty Mutual.
14
Ibid.
15
16,
See Section E, p . 12.
Based on "Product Liability Insurance - Background Report
on Statistical and Rating Procedures," ISO, December, 1976.
'''''see pp. VI-28.
1 R
°MAPI - Dimensions of the Product Liabil ity Problem , April
25, 1977.
19
20
Insurance Study,
Insurance Study,
^^Prepared by
Administration .
22see Table V-3.
p. 2-21.
p. ES-5.
Howard
B. Clark, Federal
Insurance
^^See ISO's Product Liability Insurance Report, December
1976.
2^Memo from Howard Clark to Task Force dated 8/23/77.
^^ISO, Preliminary Report on Closed Claim Survey, December
1976.
26
See pp . 31 .
27
28.
Testimony, op . cit .
'These companies are: Aetna Life and Casualty Company of
Hartford; The Travelers Indemnity Company, Hartford, Connecticut;
Hartford Accident and Indemnity Company of Hartford; The
Continental Insurance Company of the State of New York; United
States Fire Insurance Company of New York; Liberty Mutual
V-52
Insurance Company of Boston, Mass.; Continental Casualty Company,
Chicago, 111. (CNA); United States Fidelity and Guaranty Company;
St. Paul Fire and Marine Insurance Company, St. Paul, Minn.;
Royal Globe Insurance Company of Chicago.
^Testimony of Liberty Mutual Insurance Companies before the
Subcommittee on Capital, Investment and Business Opportunities of
the Committee on Small Business on June 28, 1977.
3 As noted by the Insurance Study (p. 2-4) "Individual
insurance company reports to stockholders and to A. M. Best's
Reports calculate expense components as a percentage of written
premium. Insurance Expense Exhibits filed with State Insurance
Departments calculate all expense components as a percentage of
earned premiums."
31
Standard & Poor's Industry Surveys, Volume 1, March 10,
1977, p. 1-24.
3^Ibid .
33ibid. p. 1-25.
3^Ibid . pp. 1-25-26.
■^■^Insur ance Study, p. 3-16.
36see Insurance Study, p. 3-18.
37
Insurance Study p. 3-16.
S^Minn. Rev. Code, Ch . 72A.061, as amended 1977.
S^House bill 2410.
V-53
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V-55
Table V-3. — Product Liability
Rating Methods^
Rating Method
Manual rated
(monoline policies)
Smal 1 ( a ) rated
Package policies
Composite rated, loss
rated and large (a)
rated
Percent of Product Product Liability
Liability Total Experience Reported
Premium To ISO
10 - 15%
30 - 35%
30%
20 - 3 0%
Complete detailed
experience reported
Summary experience
only is reported
None
3
None broken out
1
Source: Based of information provided in ISO's Product
Liability Insurance Background Report, December, 1976
2
In 197^ ISO began collecting exposure data for (a) rated
risks in classification detail. Future rate revisions will
reflect these data which are essential for ratemaking.
3
ISO is planning to collect these data in the future in the
same detail as is done for manual rated.
4
Only summary data for all general liability experience,
including products liability, are reported.
V-56
Tabic V-iJ,
Basic Monol inr Rate Increases _for Product. Liability Insurance
December 197b Over Aup.ust 1975
Product Classes - Manufacturing
Tanks metal (not pressurized)
Metal goods manufacturer
Machinery
Construction, mining 4 materials
handling equipment
Trailers, mobile homes
Campers, camper bodies
Rate
Type
Rate
increases
(a)
(a)
(a)
(a)
(a)
(a)
Rate
.no r
eases
Aug . 75 Comb Ined
PI K PD Rate
Per $1 , OOP Sales
.45
10-1 . 30
2.60
70
50
50
Dec. 76 Combined
BI I, PD Rate
Per $1 , 000- Sales
$ 5.00
.75-15.00
20.00
12.50
5.50-16.00
10.50
Percent
Increase
In Rate
1,011$
650-1 ,05*4%
669%
63556
267-967%
600%
of MOO to 600%
Industrial machinery equipment
Metal working machinery and
equi pmen t
Motor vehicles, personal type
Wire rope or cable
Trucks, bodies
Toys
Power equipment - household type
Tools, hand typo (powered)
Trailers
Playground & exercise equipment
Val ues
Auto bodies excluding trailers
Tools, hand type (not powered)
Food-processing or packing equip.
Food - animal use
(manufacturing/ packer)
Bottles and jars
Electrical generating machinery
Cases in steel cylinders
Electric appliances equipment
- household type
Pumps
Railroad equipment - mobile type
Products (not otherwise classified)
Cutlery (not powered or flatware)
Swimming pools or accessories
Computers
Metal goods stamping (not signs)
Auto, bus, truck parts
Instruments - analytical, testing
& recording
Instruments - control
Ammunition including component parts
Engines - turbines not aircraft
Medical, dental, surgical diagnostic
treatment machines
Ammun ition
Instruments
Furniture & equipment (infant)
Detergents - household use
Signs, metal
Signs (not otherwise classified)
Seedsmen, including misdelivery
& germination failure
Sporting goods
Plastic & rubber goods
Seedsmen, including misdelivery,
excluding gerimation failure
Tools, dies, jigs and fixtures
Fireproofing equipment
Bolts, nuts & screws
Cans, metal (pressurized)
Bus bodies
(a)
$
2.60
$ 7
50-27.50
189
-958%
(a)
3.00
10
50-27.50
250
-817%
(a)
1 .75
5
50-16.50
214
-843%
(a)
.95
5.50
479%
(a)
1.70
9.50
459%
(a)
.83
4.20
406%
(a)
2.70
5
50-21 .50
104
-696%
Rate increases
of 300 to iJOO?
(a)
$
2.70
$ 5
25-21.50
94
-696%
(a)
1 .70
4
50-1 1 .00
165
-547%
(a)
1.70
7.65
350%
(a)
1 .20
5.00
317%
(a)
1.05
4.30
310%
(a)
.65
2.65
308%
(a)
4.00
1 1
00-21.00
175
-425%
Rate increases
of 200 to 300%
(a)
$
.28
$
1 . 10
293%
Manual
1.37
5.27
285%
(a)
.95
3.35
253%
(a)
.65
2.25
246%
Manual
.32
1 . 10
244%
(a)
.95
3.25
242%
(a)
.90
3.00
233%
(a)
.85
2.80
229%
Manual
.50
1.61
222%
(a)
1.30
4.15
219%
(a)
.95
3.00
216%
(a)
,
0-1 .30
35-3.50
250
-169%
(a)
2.35
7.25
209%
(a)
1.30
4.00
208%
(a)
1.30
4.00
208%
(a)
.85
2.60
206%
Man ua 1
.90
2.75
206%
(a)
3.30
10. 05
205%
(a)
1 .70
5.16
204?
(a)
.25
.75
200%
(a)
.85
3.00
200%
Rate increases
of 15C
to 200%
Man ual
$
.66
$
1.97
199%
Manual
.60
1.75
192%
Manual
.60
1.75
192%
Man ual
1 .07
3.10
190%
Manual
.90
2.60
189%
(a)
.35
1.00
186%
(a)
.57
1.60
181%
Manual
.49
1.37
180%
(a)
.90
2.50
178%
Man ual
.49
1.31
167%
Manual
1 . 17
3.07
162%
(a)
2. 10
5.50
162%
V-57
Table V-U .-- (Continued )
Product Classes - Mar.ufacturing
Caskets
Parachutes
Doors 4 windows, metal
Chemicals - household use
Auto, bus, truck brake linings
Boats - inboard, outboard
Boats
Cans, metal (not pressurized)
Firearms
Firearms - handguns, rifles and
shotgun s
Hatcheries (poultry)
Plastic & rubber goods - household
Medical, dental, hospital or
surgical equip, (not expendable)
Orthopedic, ambulation or
prosthetic devices
Electrical wire or cable
( insulated )
Electric wire & cable
Seedsmen, excluding misdelivery
& germination failure
Clothing, millinery or other
wearing apparel
Automobile, bus, truck tires
Office and accounting machinery
(not computers)
Meats and poultry (not in
containers)
Automobile accessories
CheiTiicals - herbicides
Abrasive wheels
Aug .
75 Combined
Dec .
76
Combin
ed'
Percent
Rate
BI
& PD Rate
BI
&
PD Rate
Increase
Type
Per
$1 ,000 Sales
Per
$1 ,
000 Sal
es
In Rate
Manual
.05
.135
160J
(a)
1.25
3.25
160?
Manual
.22
.57
159J
(a)
1.85
4.75
157J
(a)
1.95
5.00
156%
Manual
1. 10
2.75
150%
(a)
1. 10
2.75
150%
Rate increase
■s of
100 to 150%
$ .55
$
1. 13
Manual
147%
Manual
.85
2. 10
117%
(a)
1.70
'». 15
14U%
(a)
1.07
2.60
143%
(a)
.HO
.95
138%
(a)
2.55
Rate increases of 100 to 150% cont'd.
(a)
Manua 1
(a)
(a)
Manu al
(a)
(a)
Manual
Manual
(a)
(a)
$2.55
.65
.65
.27
.066
6.93
.35
.099
.55
1.95
2.21
6.05
6.05
1 .50
1 .50
.60
. 146
15. 13
.75
.209
1. 16
4.00
4.50
137%
137%
131%
131%
122%
121%
1 18%
1 14%
111%
1 1 1%
105%
104%
Prod uct Classes
Kanuf ac tur ing
other than
Rate increases of 100% or more
Machinery & equipment, not
household type (a)
Structural iron & steel,
excluding erection (a)
Tobacco products Manual
Not food or drink (not otherwise
cl assi f ied ) (a)
Gas, oil or other fuel Manual
Soft drinks, carbonated in
cans (bottler) Manual
Electric (retailers) Manual
Refrigeration equipment Manual
Boat yards 4 marinas (a)
$ 2.60
.65
.031
.20
.96
.181
.38
.40
1.45
$ 7.50-27.50
2
.50
. 101
.65
2
.60
. 441
.89
,88
3,
,00
189-958%
285%
226%
225%
171%
144%
134%
120%
107%
Source :
ISO
V-58
Table V-5 . — Increased Limits Factors
For Bodily Injury and Property Damage
Bodily Injury Limits
Aggregate
Limit
(Limit are
in thousands)
Limits per Occurrence
(Limits are in thousands)
50
100
200
250
300
25
1 .00
50
1.29
(1.33)
100
1 .85
(1.95)
200
2.38
(2.62)
250
300
2.60
(2.90)
2.76
(3.12)
1
There are two sets of increased limits factors for bodily
injury which correspond to the two tables (Tables A & B) product
liability monoline rates published by ISO. The majority of
product classes are contained in Table B. The increased limits
factors for Table A product classes are shown above in
parentheses, and those for Table B product classes are shown
without parentheses.
Source: ISO Rate Manual, Edition November 1976.
Property Damage Limits
Ltmit
(LImlOars
Limit per Occurrence
(Limits are in thousands)
In thouumdt)
5
7.5
10
15
20
25
35
50
25
35
50
75
100
1.00
1.06
1.12
i.ia
1.24
1.30
1.42
1.48
1.54
1.60
1.54
1.66
1.72
1.73
1.84
1.72
1.84
1.95
2.03
2.14
1.S4
1.05
2.03
2.20
2.26
1.95
2.08
2.20
2.32
2.38
2.20
2.33
2.50
2.56
2.56
2.74
2.80
V-59
Table V-6. — _?]"_0(:i ucjt Liability Classes
V.' i t h f^'onol ine Premiums
o_f $10 or Mo r e Per S 1 , OOP of Sales For Coverage of
$250,000 BI, $5 0, COO PD , Per Occurrence
Product Class
Basic Limits Rates
!I Rate
PD Rate
Combined Rates
For $250,000 BI,
$50,000 PD, Per
Occurrence
Fuels, Gasoline, Oil or Other
Liauid Fuel
2.60s
3. 40
17. 06
Hanuf ac tur ing
Abrasive Wheels
Ammun i t ion- incl . component pts.
Hand Guns, Rifles, Shotguns
Automobiles, Buses or
Tr ucks
Auto Bodies-excl. trls.
Auto etc. Brake Lining
Auto Bus Trk. Pts.
Automotive Mfgr.
Water Spring in Bottles
Not Sparkling or Carbonated
(Bottler)
Water Sparkling
Bus Bodies
Campers and Camper Bodies -
not Trailers
Chemicals-Herbicides
Chemicals--H . H. Use
Construction Mining and
Material Handling Equipment
Contact Lenses
Electrical Equi pment-for Direct
and Indirect Application to
the Body
Farm Machinery & Equip.
Fire Extinguishers
Fire Arms Handguns, Rifles
& Shotguns
Food Processing or Packaging
Equi p .
Industrial Machinery &
Equip.
Instruments-Analytical Calibrating ,
Testing or Recording
Instruments-Control
Ladder s-Incl . Chair Step or
Stool-Wood
Ladders-Inc. Chair Step or
Stool-
Machinery
Medical, Dental Hospitals or
Surgical Equip. Non-Expendable
4. 00
50
1 1. 80(
5.00
. 16
13.45g
/ .75
to
/
.05
to
/ 2.32
/I 0. 00
.50
/30. 40@
4.00
.30
12.440
4.50
.50
14.45^
6.00
1
.25
20. 90g
/ 4.00
to
/
.25
to
/I 1 . 10
/lO.OO
/
.75
/28. 10@
6.80
.29
6.60
. 18
5. 00
.50
10.00
.50
2.50
1.50
4.50
.25
10.00
2.50
7.50
. 11
90.50
49. 50
15.00
6. 00
25
/ 3.00
to
/15.00
50
2.50
1
.50
4.00
. 15
/10. 00
to
/20.00
1
.00
/ 5.00
to
/2
.50 to
/20.00
/7
.50
2. 50
1
.50
2. 50
1
.50
.08
.08
5. 00
.05
18.49
17.66
14. 40@
27
10
12
33
19
40@
70@
40^
OOg
81
10.58
/40. 40@
10.70@
1 0. 82§
/28.80
54.800
/20. 00
/73.OO0
10.700
10.700
235.52
128.92
53.000
15.740
V-60
Product Class
Basic Limits R a t e s ^
BI Hate PD Rate
Combined Rates
For $250,000 BI,
$50,000 PD, Per
Occurrence^
05
?5
Medical, Dental, Hospital or
Surgical Diagnostic or Treatment
Machines 10.00
Metal Goods / .50 /
/10.00 /5.00
Metal Goods Stamping not Signs / .25 / .10
/ 2.50 /I .00
Metal V/orking Machinery /10.00 / .50
and Equip. /25.00 /2.50
Motor Vehicles Personal / 5.00
Type /15.00
Orthepedic, Ambulation & Prosthetic
Dev ices 6.00
Playground or Exercise Equipment 7.50
Power Equipment
H.H. Type-Outdoor & V.'orkship 20.00
Swimming Pools or Accessories 4.00
Tanks-Metal-not Pressurized 4.00
Tanks-Metal / .50
Pr essur i zed / 1 0. 00
Tools-Hand Type / 5.00
Powered /20.00
Toys 4.00
Trailers / 4.00
/10.00
Trailers - / 5.00
Mobile Homes /15.00
Truck Bodies 7.50
Valves 2.50
V/ire Rope or Cable 5.00
/
.50
/I
.50
.05
. 15
1
.50
. 15
1
.00
/
.25
/5.00
/ .25
/I .50
.20
/ .50
/I .50
/
.25
/I
00
2
00
2
50
50
26. 14@
/ 2.00
/40.00g
93
30@
/27.40
/72.00@
/14.40
/40.20@
15.74@
19.920
56.
10.
13.
/ 2.
/40,
/13.
/56.
10,
/I 1.
/30,
/13.
/41,
25,
13.
14,
20g
82§
20@
00
OOg
70
20@
96@
80
200
70
80§
100
50Q
400
Service
Beauty Parlors
Stores or Dealers-Retail
2.50
2.50
13.500
Machinery & Equipment
not H.H. Type
/ 5.00
/20.00
/2.50
/7.50
/20.00
/73.OO0
'/=A range of (a) rates for a specific product class.
^0= (a) rates
V-60a
Table V-7. --Effect of ISO Revisions
On Product Liabil ity Premium Rates
Basic Limits
Overall
Percentage
Increase
Bodily Injury ( BI )
Property Damage (PD)
+ 83.5
+ 15.0
Increased Limits Factors
(applied to manual and (a) rates)
Table B ("Standard" increased limits factor)
+200. 3
Table A (Increased limits factors higher
than "standard" applied to 90 of
the 418 product classifications)
+ 74.5
1
Composite of ISO estimates of overall countrywide impact of
rate revisions of 1975 and 1976 by type of increase. Basic
limits rates are for BI limits of $25,000 per occurrence and
$50,000 aggregate. PD limits are for $5,000 per occurrence,
$25,000 for all damages.
2
Excludes six states that use exception tables for bodily
injury increased limits factors. Increased limits factors are
applied against the basic limit rate to raise the limit of
liability to the desired level. An individual factor is used to
derive the applicable rate for each level of increased liability
desired .
Source: Product Liability:
Company, Inc., January 1977.
Insurance Study, McKinsey and
V-61
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V-6U
Table V-1 1 . — Comparative Analysis of Leading Indicators
for Sr.all, Medium and Large firms
Industry Telephone Survey
CGL Cost/$l ,000 Sales
nrn
1975
1976
Under
Over
12.5 mil .
£2.
5-$100
iti 11 .
$100 mil .
Total
$2.87
$1
25
$0 . 67
$1 . 17
4.86
2
36
0.89
2.32
1.H2
3
88
1 .24
3.59
Estimated Product Liability
Insurance Cost/$1 , OOP Sales
1971
1975
1976
$1 . 10
2.58
5.32
$.93
1 .47
3.23
$0. 54
0.73
1 .09
$0.74
1 . 40
2.81
Percent Change
197 1-1976
1975-1976
383X
106X
247X
120J
102%
39J
2805
1015
Average Ded uc t i bl e or Risk
R e t"e n t i o n Level ($0007
1971
1975
1976
13.2
8.9
7.4
57.3
54.3
51.0
33.6
207.4
138.3
120.4
334.5
232.6
Percent of Firms Reporting Claims
1971-1976
50
96
56
Average No . of Pend ing
CliTns Per Firm
1971
1975
1976
Percent Change
1971-i'97d
1975-1976
Average No . of New Claims Per Firm
1971
1973
1975
1976
.01
.06
.08
700S
33X
,02
.06
.08
,07
.58
3.18
13.79
46.82
65.01
3.4
14.0
18.9
496%
9%
371'.
39%
456?
35%
.9
1 .2
1.6
1.3
16. 1
39.0
38.2
33. '^
4.3
11.1
11.4
9.9
A V e r a p, e Amount of Damages
Sought Per Firm
1971
1975
1976
$250
,400
, 100
$102, 100
1 ,642,900
1 , 394, 300
$1 ,936,700
6, 142, 300
13,892,400
$434,000
1 ,976,700
3,526,900
Average Settlement Amounts Per Firm
1971 $900
1973 600
1975 100
1976 100
M , 400
3,200
6, 100
7,500
45,400
96,200
70,200
92, 100
$12, 100
28,200
22,200
27,800
Source: Product Liability Industry Telephone Survey, Gordon Associates, Inc.,
December 1976, Tables IV-10, IV-12, IV-15, IV-21, IV-26 and IV-28.
V-65
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V-66
Table V-13, — Estimated Allocation of Total
1 976 Product Liabil ity Premiums
TABLE I
(In bill ions)
Premiums
Underwriting expense and profit
Loss and loss adjustment expense
Loss adjustment expense
Defense legal costs
Claimants' legal costs
Combined legal costs
Combined legal costs and other
adjustment expense
Claimants' compensation
$2,080
.832
1
250
.416
.354
.250
.604
.666
.584
TABLE II
(In billions)
Premiums
Underwriting expense and profit
Loss and loss adjustment expense
Loss adjustment expense
Defense legal costs
Claimants legal costs
Combined legal costs
Combined legal costs and other
adjustment expense
Claimants' compensation
$2,080
.624
1.456
.416
.354
.312
.666
.728
.728
Source: Federal Insurance Administration, August, 1977
V-67
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V-68
Table V-15. — Product Liabil ity Insurance Incurred Losses
1
Policy Year
Ending
Bodily Injury and Property Damage Combined
2 3 4
Reported Incurred But Total
Losses Not Reported Losses Incurred Losses
Basic Limit Losses
12/31/69 $ 39,479,760
12/31/70
12/31/71
12/31/72
12/31/73,
12/31/74-
57,572,016
61 ,212, 153
69,575, 160
105,499,455
88,799, 192
10,735,010
1 , 178,798
2,622,853
9,248,235
35,688,490
61 , 153,814
$ 50,214,770
58,750,814
63,835,006
78,823,395
141 , 187,945
149,953,006
Excess Limit Losses
12/31/69
12/31/70
12/31/71
12/31/72
12/31/73,
12/31/74
19,424,715
32,582,433
46,498,334
40,253,234
61,508,039
69,300,391
7,614,687
690,399
2,083,997
3,366,195
16, 197,981
83,462,868
27,039,402
33,272,832
48,582,331
43,619,429
77,706,020
152,763,259
1
Represents manual and small (a) rated classes for all
companies reporting to ISO.
2
Latest reported losses including all adjustment expense.
3
Estimated on the basis of current loss development
estimating procedures.
4
Total ultimate losses including estimated incurred-but-not-
reported loss-es and all loss adjustment expense.
5
Preliminary data based on first report for the policy year.
Source: Insurance Services Office, May 1977.
V-69
1
Table V-1 6 . --Product Liabil ity Insurance Incurred Losses
Bodily Injury
2 3 4
Policy Year Reported Incurred But Total
Ending Losses Not Reported Losses Incurred Losses
Basic Limit Losses
12/31/69
$ 28,766,682
$ 11,336,631
$ 40, 104,414
12/31/70
45, 110,359
1 ,066,647
46, 177,006
12/31/71
48,655,707
2,396,833
51 ,052,540
12/31/72
54, 125,276
8,692,042
62,817,318
12/31/73
12/31/74
86,570,003
34,969,171
121,539, 174
70,881 ,071
57,838,959
128,720,030
Excess
Limit Losses
12/31/69
13,711,981
7,294,775
21 ,006,756
12/31/70
25,570,271
690,399
26,260,670
12/31/71
38,592,487
2,083,997
40,676,484
12/31/72
30,501 ,737
3,385,692
33,887,429
12/31/73
12/31/74
48, 157, 106
15,410,275
63,567,381
53,371,793
78,349,789
131 ,721,582
1
Represents manual and small (a) rated classes for all
companies reporting to ISO.
2
Latest reported losses including all adjustment expense.
3
Estimated on the basis of current loss development
estimating procedures.
4
Total ultimate losses including estimated incurred-but-not-
reported losses and all loss adjustment expense.
5
Preliminary data based on first report for the policy year.
Source: Insurance Services Office, May 1977.
V-70
1
Table V-17* — Product Liabil ity Insurance Incurred Losses
Property Damage
2 3 4
Policy Year Reported Incurred But Total
Ending Losses Not Reported Losses Incurred Losses
Basic Limit Losses
12/31/69 $ 10,713,078
12/31/70
12/31/71
12/31/72
12/31/73,
12/31/74
12,461 ,657
12,556,446
15,449,884
18,929,452
17,918, 121
(601 ,621 )
1 12, 151
226,020
556, 193
719,319
3,314,855
$ 10, 111 ,457
12,573,808
12,782,466
16,006,077
19,648,771
21 ,232,976
Excess Limit Losses
12/31/69
12/31/70
12/31/71
12/31/72
12/31/73,
12/31/74'
5,712,734
7,012, 162
7,905,847
9,751 ,497
13,350,933
15,928,598
319,912
-0-
-0-
( 19,497)
787,706
5, 113,079
6,032,646
7,012, 162
7,905,847
9,732,000
14, 138,639
21 ,041 ,677
1
Represents manual and small (a) rated classes for all
companies reporting to ISO.
2
Latest reported losses including all adjustment expense.
3
Estimated on the basis of current loss development
estimating procedures.
4
Total ultimate losses including estimated incurred-but-not-
reported losses and all loss adjustment expense.
5
Preliminary data based on first report for the policy year.
Source: Insurance Services Office, May 1977.
V-71
Table V-18. --Pfo^lurl-; GpnT.iMnp, Mo.-it Payment DoUf
'oUlT/ irljur )
(Uri tr-riiaoo aod Irr-nded)
(Tren-ied Va.ues ^ire In farcnthoses)
Product
"Cod c /Tl ame
061 Electrical Appliances
or Equip. (Installation,
service or repair)
212 Miscellaneous
Machines
Oil Clothing (synthetic)
(not shoes, boots or
si ippers)
172 Chemicals
901) Tractors, Trucks,
Mobile Homes, Cacpers
165 Other Metal Goods
933 Asbestos
198 Surgical or Hospital
Equip. & Supplies
215 Food Processing
Equipment
218 Fork Lift
1H2 Motor Vehicle
Accessories
921 Containers - Boxes,
Packages, etc.
906 Cloth, Fabric, Thread,
etc .
101 Lights - Bulbs
117 Glassware, Porcelain,
Pottery (Bottles)
919 Laundry Centrifugal
Extractor
166 Firearms (Parts
Included)
138 Automobile
161 Tools (Powered)
012 Clothing (non-synthetic!
(not shoes, boots or
si Ipper s)
902 Intrauterine Device
211 Agriculture Equip.,
Excluding Food Prccesslrg (1.1)
080 Air Conditioning
Installation, Servicing
or Repairs
1 1 1 Chairs
139 Snowmobile
152 Bolts, Nuts 4 Screws,
Nails
192 Ml scell nneous Electrical
Apparatus
t of
Total
Average
of Non-Zero
Number
With
Payment
Payments
Payment
1.5
(6.7)
$ 52,011
(236,332)
25
6.3
'6.1)
12,522
(129,577)
t3
5.5
'6.2)
176,181
(605,023)
9
1.9
'5.6)
22,391
(205,827)
21
5.6.
(5.0)
53,962
(115,527)
30
1.7
'.5.1)
97,319
(281,911)
11
2.2
n.9)
81,128
(127,819)
8
3.7
(3.8)
30,791
(91,111)
35
1.7
!3.1)
61,165
(313,918)
8
3.6
(2.9)
80,905
(197,800)
13
2.8
(2.7)
19,378
(57, 111)
12
2.7
(2.2)
52,018
(126,686)
15
2.2
(2.1)
103,800
(306,250)
6
0.6
(2.1)
27, 167
(286,971)
6
1.3
(1.7)
6,205
(25,281)
59
0.7
(1.7)
195,000
(1,151,700)
1
2.2
(1.1)
57,605
(108,258)
1 1
0.8
(1.3)
8,820
(13,632)
27
1.1
(1.3)
16,101
(15,928)
1.3
(1.2)
31,838
(89,512)
12
1.9
(1.2)
9,133
(18,688)
58
1.9
(1.1)
11,368
(76, 111)
1.2
(1.0)
175,250
(121,518)
2
1.5
(I.O)
11,102
(30,363)
29
1.0
(l.C)
71,250
(217,185)
1
1.2
(1.0)
88, 125
(216,198)
1
l.C
(1.0)
18,333
(111,818)
6
Source: Insurance Service? Office, _1_976 fri^^-PS-t liability
CI osed Cljilni Survey , f r_eljir_l n_ar y An.Tl y?i s of Sur_v_cy Rr.'^ul t B ,
Tioi-ombor" l'jT6. "
V-72
Table V-19. — Products .".c^
(Untron
(Trended Valu
Product
Code/Name
142 Motor Vehicle
Accessor ies
215 Food Processing
Equi pmen t
069 Roofing
026 Plumbing Fixtures
4 Fittings
217 Petroleum, CheTiical anJ
Drug Products
(Industrial )
214 Agricultural Equipment
Excluding Food
Processing
155 Paint or Varnish or
Paint Remover
059 Boiler Installation,
Servicing or Repair
088 Systems or Refrigeration
Installation, Services
and Repair
165 Other Metal Goods
077 Sewer Constr uc-ion ,
Cleaning or Repair
050 Construction or
Sur fac ing
161 Valves
006 Food (Bagged, Potted,
Boxed Except Keat
Products) Mo Canned
Food s
115 Fire Extinguisher
113 Tires (Non-Belted)
151 Electrical Parts
and Accessor if; 3
910 Oil Furnace
958 Busines-; FquipTont -
Office Furniture
n e r a t i n .; '.
'.vt Paytrn»nt Doll
'ir 3
perty D.tm
>^. e
dec and Ti
ended)
.
OS are in
Parentheses)
t of
Average
Njmbor
Total
of Non-2ero
With
Fay'-nent
Payments
Payment
16.5
$ 26,. -59
(22.3)
(63, B3)
19
7.0
22,C33
(11.0)
(69, 119)
21
5. 1
12,f 91
(6.3)
(30,^32)
31
2.8
9,651
(1.2)
(27,736)
23
5.0
8,570
(1.0)
(13,323)
16
^■.3
33,571
(3.7)
(55,329)
10
3.8
13,597
(2.9)
(20,C42)
22
2.C
8,252
(2.8)
(22,551 )
19
1.5
23,903
(2.7)
(81,248)
5
3.9
38,237
(2.1)
( 1 5 , ■ 9 1 )
8
2.7
17, '■37
(2. 1)
(26,752)
12
2.6
5,556
(2.0)
(7, ;i7)
39
2.0
12, C77
(1.7)
(19, --33)
13
1.8
(1.7)
2
(5
c7 8
517)
1.8
(1.6)
10
(17
230
•33)
2.2
(1.5)
1
(5
■;01
■^50)
1. 1
(1.1)
13
20
(93
511)
0.8
(1.0)
1
(1 1
533
rj2)
1 .2
(1.0)
CI?
v92
202)
18
11
13
Courcr-: 1 n.'ur.irice r,'.-r y i'. rr, Cff. -■;-., J^'(75 rrudu'-t L.ilnlity
C)os'-d Cl.ilm ^'Urvey, Pr ■;■) i i', 1 n .r y nn:.ly-,i-; t.| 'i"!}^''/. ^"•'■J-' L'-l '
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Table V-22. — Distr ibution of Product Liabil ity Claims
by Injured Party ' s Status in Occurrence
(Untrended and Trended)
(Trended Values are in Parentheses)
Status of Injured Party
Percent of
Claims with
Payment
Bodily Injury
Percent
of Total
Payment
Average
of Non-
Zero
Payments
Employee - Injured in
Course of Employment
Purchaser of Product
Non-Purchaser, Used or
Consumer
Other
Total Distribution
Number of Claims with Payment
Employee - Injured in
Course of Employment
Purchaser of Product
Non-Purchaser, User or
Consumer
Other
Total Distribution
Number of Claims with Payment
i48.6%
$ 42,011
11.1%
(48.7)
(128,684)
25.7
3,803
6U.8
(23.6)
(10,677)
1 9.1
9,695
19.2
(23.2)
(35,535)
6.3
12,215
4.9
(4.4)
(26, 117)
9,591
100. 0%
100.0%
$ (29,312)
2,937
Property Damage
218
Q.n%
0.0%
(282)
58.5
3,508
80.2
(50.6)
(5,910)
28.3
13,290
10.2
(38.8)
(35,463)
13.2
6,961
9. 1
(10.6)
(10,902)
4,809
100.0%
100.0%
(9,364)
1,583
Source: Insurance Services Office, 1976 Product Liability Closed
Claim Survey, Preliminary Analysis of Survey Results; December 1976.
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V-^O
Table V-27.—
Total Property- Casualty and Mi scellaneous
Liabil ity Premiums
(bill ions')
1972
1973
1974
1975
1976
Proper
'ty
Casual
-ty
$38.
9
42.
0
44.
6
49.
5
59.
5
M
iscell
aneous
Liabi
11
ty
$2.
6
2.
7
2.
9
3.
8
5.
2
(est.
)
Source
Best's Insurance News Digest, Property/Casualty
Edition, Jan. 3, 1977
Table V-2 8. --Property- Casual ty and Mi scellaneous
Liabi 1 ity Comb i ned Loss Ratios A f ter Div idend s
Year
Property-
Casualty
Miscellaneous
Liabil ity
1972
1973
197 4
1975
1976
96.2
99.2
105.4
107.9
102.8 (est.)
114.7
1 17. 1
125.9
116.5
102.5 (est.)
Source: Best's Insurance
Edition, Jan. 3, 1977.
News Digest), Proper ty/ Casual ty
V-81
Table V-29. — Loss Ratios and Aggregate Premiums , 1 0 Leading Writers
of Miscellaneous Liabil ity Insurance and Total Industry
lOCorn p a nies
All Cornpan i e s
Year
1972
1973
197^
1975
1976
Loss
Ratio
89.6
95.9
97.5
80.6
71.2
Incurred
Losses
(Mill ions)
$ 912.5
1 ,050.9
1 ,139.0
1 , 168.0
1 ,432.6
Agg
regate
Premiums
(Mi
11 ions)
$1
,018.
3
1
,095.
8
1
,168.
7
1
,449.
6
2,012.6
Loss
Ratio
84.4
86.5
96. 1
89.6
78.6
Aggregate
Premiums
(Mill ions)
$2,555
2,701
2,936
3,824
5,205
Source: Data for all companies from Best's Insurance News
Digest, Property/Casualty Edition, January 3, 1977 Data for ten
leading companies from annual reports of companies listed on page
V-29.
Table V-30. — Range in Loss Ratios for 10 Leadini
Writers of
M
iscellaneous Lis
lb
ility Insurance
10
Comp,
anies
1972
70.6
to
126.5
1973
79.5
to
137.0
1974
70.3
to
144.0
1975
64.7
to
115.0
1976
63.2
to
87.9
Source: Annual reports of companies listed on page F-1 .
V-82
Table V-31. — Surplus Line Premiums Reported By
Major State Insurance Departments
Top j_0 States (1975)
1972
Premiums ($ million)
1973 1974
1975
California
38.4
41. 1
54.0
78. 1
New York
50.6
44.3
43.6
72.2
Texas
30.9
35.9
48.5
66.9
Louisiana
44. 1
43.2
44.9
60. 1
Florida
15.3
18.4
20.8
34.5
Pennsylvan ia
12.2
10.4
16.4
29.4
Illinois
21 .3
25.9
22.8
27.9
New Jersey
18. 1
19.7
18. 1
24.8
Michigan
N.A.
N.A.
N.A.
12.6
Georgia
5.9
6.9
8.8
15.5
All other states
79.3
97.7
114.7
290.8
Total
323.3
348.6
405.4
612.8
Percent increase
year to year
72-73
7.8X
73-74
16.3%
74-75
51.0%
Source: State Insurance Department Annual Reports.
V-83
Table V-32. — Total American Reinsurance
(in millions)
Primary
Company with
Unl icensed
Professional
Alien
Professional
Reinsurance
(foreign)
Year
Reinsurers
Department
Reinsurers
Total
I960
$ 385
$ 223
$ 462
$1 ,070
1965
592
392
510
1 ,494
1970
1 ,007
598
71M
2,319
1975
2,321
1 , 102
1,221
4,644
I960 to 1975 percent increase in premium volume by type of
reinsurer .
503%
394%
164%
334%
National Underwriter 12/10/76 (pages 36 & 37).
V-84
Chapter VI
Major Impacts of
Product Liability
MAJOR IMPACTS OF PRODUCT LIABILITY
INTRODUCTION
The increase in product liability premiums, as well as
modifications in product liability law, has had a number of
impacts on those who produce, distribute or sell products. It
has also affected persons who use products and those who are
injured by them. We have discussed a number of those impacts
throughout this report; however, it appeared useful to synthesize
our information in one chapter.
Most of the topics addressed here were analyzed in summary
form in the Task Force's Briefing Report. When discussing those
subjects we will refer to the findings of the Briefing Report and
then indicate what has been learned to either qualify or support
that assertion as the result of our consideration of materials
outlined in Chapter I at p. 1-7 _et. seq . The topics discussed
will be: availability of product liability insurance;
af fordabil ity of product liability insurance; product
introduction and discontinuation; business failures; trends in
the number of product liability claims; compensation obtained by
persons injured by products; the relationship between product
liability claims and product accidents; Worker Compensation
systems; and product liability loss prevention.
As the discussion about some topics, e.g., business failures,
will show, there is very little solid information available.
Nevertheless, we have decided to discuss these subjects in order
to abate the growing amount of misinformation that has been set
forth about product liability.
A summary of our major findings appears at the end of this
chapter .
VI-1
DISCUSSION OF THE MAJOR IMPACTS OF PRODUCT LIABILITY
Availability of Product Liability Insurance
Introduction
Several definitions of unavailability, as it applies to
product liability are conceivable, and persons may differ as to
which one is correct. The following working defintion appeared
to be appropriate for the purposes of this report. Product
liability insurance is unavailable to a firm when, after a
thorough search of the insurance market, that firm is unable to
obtain a quotation for products coverage which effects a
reasonable transfer of risk from the insured to the insurer. To
the extent the firm is unable to obtain coverage which it
considers to be adequate, there may be partial unavailability.
The Task Force's Briefing Report found that only a few
companies have been unable to obtain product liability insurance.
The report noted that the problem "appears to be more one of
af fordabil ity , than availability." Briefing Report at p. 6.
Nevertheless, sources, both before and after tHe~~plfb^i c a t i o n of
the Briefing Report, have asserted that product liability
insurance is widely unavailable. They have not been able to
document these assertions.
We find that the situation does not appear to have changed
since the time of the Briefing Report--there still is no evidence
of a widespread problem of product liability insurance being
unavailable. A review of the findings of our industrial and
insurance contractors, industry association surveys, and reports
of state insurance commissioners supports this assertion and
develops the nuances of this finding.
In that regard, the product liability situation would appear
to be different from that of medical malpractice in that product
liability insurers are not leaving the market altogether.
Surveys suggest that many companies are willing to write product
liability insurance . Still, some companies in our target
industries and in other high-risk product lines are having
difficulty obtaining insurance.
VI-2
It is difficult to draw a precise picture of the nature and
extent of these "pockets" of unavailability. There are three
reasons for this. First, it is not always clear whether a
potential insured made a thorough search of all sources before
concluding that product liability insurance was unavailable.
Second, some companies reporting unavailability problems may have
bad claims records and may be producing unreasonably unsafe
products. The Task Force has concluded that unavailability of
insurance to companies of this type should not be considered part
of a legitimate availability problem. Finally, some reported
availability problems may really be af fordabil ity difficulties:
the company may in fact be able to transfer product liability
risks onto an insurer. For example, some firms whose product
liability premiums have increased by several hundred percent in
one year may assert (when polled in surveys) that such insurance
is "unavailable." We would note that at some point problems of
af fordabil ity and availability merge. We discuss this issue in
the next section of this chapter.
Moreover, unavailability of product liability insurance can
also arise in a "partial" sense. This occurs when insurers
impose limits on amounts of coverage, require large deductibles,
or otherwise restrict products coverage. We will discuss limited
or partial unavailability in this section and set forth our
conclusions on pp. VI-52 - 53. Thus, the discussion that
follows is divided into two major parts: (1) total
unavailability, and (2) partial unavailability.
Total Unavailability: Analysis
Insurance Study . --The Insurance Study concluded that the
availability problem--though not insignif ican t--was not severe as
of December 1976. See Insurance Study at 3-1M. The contractor
found, however, that some manufacturers in each of the Task
Force's target industries (with the exception of grinding wheels
and aircraft components) were having difficulty obtaining
coverage. Manufacturers of heavy industrial machinery were
experiencing the most serious problems while firms in the
grinding wheel and aircraft components industries apparently were
having no problem obtaining products coverage. See Insurance
Study at ES-6, 3-3.
VI-3
^
The insurance contractor found it difficult, however, to
obtain data concerning specific instances in which companies were
unable to obtain products coverage . The interviews with
underwriters and brokers did show that insurance companies are
providing products coverage on a "very selective basis" for
certain categories of products .
In an effort to gain a better understanding of the
availability of products coverage, our insurance contractor
analyzed information compiled by the Task Force staff regarding
firms which claimed that they had been unable to obtain product
liability insurance. These companies included firms that (1)
responded to the Industry Study's telephone survey by October 20,
1976, (2) responded to the RETORT Survey (for a description of
RETORT, see Jd^. at 3-1, 3-8), or (3) contacted the Department of
Commerce, the Task Force, or the Senate Select Small Business
Committee directly.
On the basis of this information, the insurance contractor
identified 62 companies by name that did not have products
coverage because it was alleged to be either unavailable or too
expensive .
Industry S_tud_y . --Approx imately 86% of the firms in the
Industry Study's telephone survey indicated that they carried
some form of product liability coverage. The propensity to carry
products coverage varied directly with firm size as follows:
Firm Size in Sales Percentage of Firms
( Millions) with Coverage
L ess t h a n $2 . 5
$2T5^o"TlW^^
$100 and over
Source: Industry Study, Table IV-6 at IV-25
Of those firms that did not carry products coverage, only
four indicated that they could not obtain coverage at any cost.
One firm indicated that its previous coverage had been cancelled,
71
.3
87
.4
97
.3
VI-U
and nineteen firms indicated that products coverage was too
expensive. XI • ' Table IV-7 at IV-26. No further information was
available as to why the four firms were unable to obtain
coverage, how hard they had searched, or what their claims
experience had been. Nor did the survey show what premium levels
were considered by the respondents to be too expensive.
Industry Association Surveys. --Several industry associations
collected information regarding the availability of product
liability insurance to their members. Some that provided
detailed information on the question of availability were the
National Federation of Independent Business ("NFIB"), the
National Machine Tool Builders Association ("NMTBA"), the Farm
Equipment Manufacturers Association ("FEMA"), and the Machine and
Allied Products Institute ("MAPI").
The NFIB conducted a survey of its small manufacturer
members. Of the ^,214 questionnaires mailed, 1,296 responses
(30.8 percent) were received. Many of the survey's questions
concerned the availability of product liability insurance.
The NFIB Survey found that approximately 587o of the small
manufacturers surveyed carried some form of product liability
coverage . It was found that the larger the firm (in terms of
gross sales), the greater the firm's propensity to carry products
coverage . This finding was in accord with the results of the
Industry Study's survey.
Those firms which did not carry products coverage gave the
following reasons:
Response
Percentage of Firms
without Products
Coverage
"Don't Need Any"
"No Insurer will
Carry me"
"Premiums too High"
"Never Considered It"
"Self-Insured"
"Other"
"N/A"
38.9
2
20
27
2,
3.
6
Source: NFIB January 1977 Survey, Table 3, at 4
VI-5
As this table shows, only 2.1 percent of the firms without
products coverage indicated a direct availability problem. One-
fifth of the firms without coverage (8.5 percent of all firms
surveyed) stated that they could not afford the level of products
coverage desired. Some 15.6% of the entire survey sample stated
that they did not need products coverage, and another 10% of the
firms surveyed stated that they had never considered carrying
products coverage.
Surveys completed by both the NMTBA and the FEMA indicate
that some of their members had difficulty obtaining product
liability insurance in 1976. An unspecified number of NMTBA
members reported that they were operating without products
coverage in 1976. Furthermore, firms in both associations were
notified in 1976 that their products coverage was going to be
cancelled . The surveys did not determine whether firms whose
products coverage was cancelled were subsequently able to obtain
coverage from another insurance carrier.
The MAPI 1976 Survey did not report any cases of
unavailability among those who responded to its questionnaire.
State Insurance Commissioners . — State insurance commissioners
from Massachusetts, Michigan, New York, Pennsylvania, and
Virginia met with the Task Force staff on November 11, 1976, to
discuss, in part, the unavailability of product liability
insurance. Several of the commissioners reported that they had
received a few complaints (10-30 in number) regarding products
coverage but that those complaints focused upon the cost of
coverage rather than its availability. None of the commissioners
believed that there was an availability problem for products
coverage in his state.
As a follow-up to that meeting, the insurance contractor
requested the state insurance departments of California,
Louisiana, Illinois, New York, Pennsylvania, and Texas to compile
data on complaints they had received regarding product liability
insurance. The consensus was that there was no severe
availability problem at that time .
In June 1977, the state insurance commissioners, acting
through the National Association of Insurance Commissioners (the
VI-6
"NAIC"), concluded that there was no evidence of a "widespread
availability problem" for product liability insurance . Based
on its study of product liability, the NAIC has concluded that
the availability problem _ is both___shor-t^=^tBrm aiixl____ljjmited
es"5entially to small manuf ac.turieiLS
In order to meet this limited unavailability problem,
insurance commissioners in at least 21 states have encouraged the ^
formation of voluntary market assistance programs within their I'Ar^
states to provide product liability insurance to companies that
have found such insurance to be unavailable . These programs,
which were endorsed by the NAIC as the appropriate solution to
the limited availability problem it identified, do not address
problems of a f fordabil ity
Correspondence Received by the Task Force . --As indicated in
the Task Force's Briefing Report of January 4, 1977,
correspondence received by the Task Force prior to the
publication of that report did not indicate that there was a
serious availability problem with respect to product liability
insurance . From January Mth until September 7, 1977, the Task
Force received only a few letters indicating that a particular
company had an availability problem. It should be noted that
after its placement of a notice in the Federal Register in
September 1976, the Task Force did not actively solicit
information on this particular issue.
Product Liabil ity Advisory Committee to the Under Secretary
of Commerce . — Most members of the Product Liability Advisory
Committee to the Under Secretary of Commerce concurred with the
Briefing Report's conclusion regarding the availability
problem
Partial Unavailability
Def in ition . — Partial unavailability of product liability
insurance can occur if insurers restrict policy limits, raise
deductibles or restrict coverages on certain products. These
limitations can force an insured to retain a risk that he wishes
to transfer to the insurance system.
VI-7
Pol icy Limitations . — Policy limitations are the maximum
dollar amounts of the insurance company's liability with respect
to a particular policy. There are limits on the insurer's
liability for each occurrence and for a total policy year. The
latter are called annual aggregate limits p. V-5.
Policy limits that insurance companies have been willing to
offer for products coverage do not appear to have changed
significantly since 1971. The Industry Study's telephone survey
showed that the average policy limits carried by the respondents
remained relatively constant from 1971 through 1976 for all three
firm size groups
The data from the various industry
association surveys analyzed by the industry contractor were in
accord with that finding
Thus, insurance companies do not seem to be forcing insureds
to retain more risk than they wish by reducing the amount of
coverage that they are willing to make available.
On the other hand, the Insurance Study found that insurance
underwriters are reluctant to increase the limits of liability
for existing policies . Thus, some manufacturers, whose
products' risk exposure appears to be increasing (due to trends
in product liability law, increases in sales, new product
introduction, or simply inflation) may be unable to protect
themselves against that increased risk exposure by raising the
limits of their products coverage. Therefore, the ratio of risk
to available coverage may actually be increasing for these firms.
Information available to the Task Force is conflicting as to
whether companies are satisfied with the policy limits available
to them. An individual representing large insurance brokerage
firms on the Product Liability Advisory Committee to the Under
Secretary of Commerce emphasized that many companies have been
unable to obtain what they consider to be adequate coverage at an
affordable price . In addition, several companies have written
to the Task Force indicating that, although they do have products
coverage, their policy limits are inadequate with respect to
their exposure
VI-8
On the other hand, the MAPI Survey indicated that most of its
member companies are satisfied with policy limits available to
them
Coverage Restrictions . — Coverage restrictions occur when
insurers limit coverage to products currently produced, or limit
the amount that will be expended on defense costs. Of course, a
restriction also occurs when an insurer excludes some of a
manufacturer's products from overall coverage. Task Force
information sources were not wholly in accord on the question of
whether coverage restrictions were increasing.
On one hand, a state insurance department study in Kansas
found no significant underwriting changes or market restrictions
affecting products coverage . In addition, the Insurance Study
concluded that coverage exclusions are rarely imposed by
insurance companies. It based this finding on its survey of
3,000 underwriting files which revealed only four instances in
which snecific products were excluded from the overall products
coverage . The Insurance Study did find, however, that there
are certain product categories which are underwritten only after
careful scrutiny of the individual risk
On the other hand, the Ind^us.tx-y^ .Study found restrictions on
products coverage to be more prevalent. Approximately 10 percent
of the firms surveyed in its telephone survey reported that
specific products were excluded from their products coverage.
Another 9.5% of the firms surveyed reported other types of
restrictions, such as the exclusion of new products or the
inclusion of defense costs within the policy limits
/^
I
The 1977 Hearings conducted by the Subcommittee on Capital,
Investment and Business Opportunities of the House Small Business
Committee produced somewhat mixed results. The Hartford
Insurance Group and the Liberty Mutual Insurance Company
indicated that their companies do not automatically exclude any
individual product categories from coverage. In contrast, the
St. Paul Fire and Marine Insurance Company does not provide
coverage for completed aircraft engines, fireworks, fuses or
explosive devices. Crum and Foster, Inc., a relatively small
writer of product liability insurance, excludes aircraft
products, pharmaceuticals, explosives and cosmetics
VI-9
Deductibles . --A deductible is that amount which the insured
agrees to pay in the event of a claim and which must be exceeded
before the insurer will provide coverage. See p. V-6 . V, p. 5.
The Insurance Study found that only 3% of the 3,000
underwriting files contained deductibles. Insurance Study at 1-
15. Fifty-nine percent of the deductibles reviewed were below
$1,000 per occurrence, while 31% were over $25,000 per
occurrence . Id .
Similarly, the Hartford Insurance Group and Liberty Mutual
Insurance Company have both stated that deductibles are contained
in less than 1% of their products policies . The Hartford
Insurance Group evidently prefers to write full products
coverage. This allows the company to retain complete control
over claims and to better detect any increases in the frequency
of small calims. Hartford indicated further that deductibles are
used only in large national accounts which desire to retain some
of their products risk but also want Hartford's claim and loss
control services, together with catastrophic coverage.
Deductibles for these accounts range between $50,000 and
$1,000,000. Liberty Mutual Insurance Company indicated that the
few deductibles in their CGL policies (only 1%) serve to exclude
nuisance claims from the coverage. Its deductibles typically
range in size between $100 and $250
/ The NMTBA Survey found that deductibles were more prevalent
\ in the product liability coverage of the firms it surveyed.
j Twenty-three percent of the 60 responding firms reported that
( they had deductibles in their 1976 product coverage . The
percentage was much higher for the 15 metal-forming companies
responding to the survey; 40% of those companies had deductibles
in 1976 .
The NMTBA Survey also found that the average size of those
deductibles increased significantly between 1975 and 1976 for
both groups. The average deductibles in 1976 for all 60
responding firms was $41,000, an increase of 52 percent in one
30a
y^s""- The average deductible for the 15 metal-forming
companies was $65,000, an increase of 63 percent from the average
1975 level. ^
VI-10
Similarly, the Industry Study found that deductibles were a
more significant factor with regard to availability than the
Insurance Study indicated. Specifically, it reported that 41% of
the firms surveyed had some form of deductible in their products
coverage. This represented a sharp increase in the frequency of
deductibles since 1975 . This finding is also in accord with
the finding of the MAPI Survey that 38% of the firms surveyed
were required to accept a deductible or retrospective
retention
The Industry Study also found that the levels of deductibles
(combined PD and BI) have increased significantly between 1975
and 1976 for both large firms (a 6^% increase to an average of
$335,000 in 1976) and medium-size firms (a 258% increase to an
average of $120,000). Industry Study, Table IV-15 at IV-37. The
average deductible for the eight small firms reporting for 1976
decreased 17% to $7,400. _Id.; or see Chapter III of this report,
Table III-9.
As with policy exclusions, it would appear that, while
deductibles are not generally imposed on products coverage, they
are becoming more prevalent among firms in the target industries.
Deductibles are also increasing significantly in size for medium-
and large-size firms, but this may be a matter of choice, not
necessity, on the part of the individual company.
Af fordabil ity of Product Liability Insurance
Introduction
The Task Force's Briefing Report found that. in the years
1974-1976, product liability insurance premiLrms rose
substantially in most target industries. Among those most
severely affected were industrial machinery, industrial
chemicals, and high-risk consumer goods such as pharmaceuticals,
automotive parts and medical devices. Anecdotal data showed.. a
i ja
similar impact on sporting goods and ladder manufacturers.
This conclusion was based on early evaluations of draft
contractor reports. As our discussion will show, the final
drafts of our contractor reports and new data that were brought
to the attention of the Task Force confirm and amplify these
find ings .
VI-1 1
This area, as is the case with others discussed in this
chapter, does have its share of misinformation. Many firms which
no longer carry product liability insurance assert that they are
unable to "afford it" because of higher premiums. If these firms
are correct in their analysis, it is a significant matter. These
situations of un af fordab il ity are the practical equivalent of a
product liability availability problem. On the other hand,
policymakers should not accept ipse dixit assertions of
unaf fordabil ity .
It is extremely difficult to determine whether increases in
product liability premiums have made coverage unaffordable for a
particular firm. That difficulty stems from the fact that
af fordabil ity is a relative concept. Each evaluation of
a f fordabil ity is tied to the specific circumstances of the firm
(or industry) being considered and requires a complex economic
analysis of those circumstances. Such an analysis would seek to
determine the price elasticity of demand for the particular
firm's product in order to determine whether the increase in
insurance premiums can be passed on to the purchaser of the
product in the f^orm of higher prices, or whether it must be
absorbed by the firm . Ultimately, the analysis would attempt
to ascertain the impact of the premium increase upon the firm's
(or industry's) ability to earn a satisfactory rate of return on
invested capital. See also p. VII-19.
Unfortunately, such vigorous analyses of af fordabil ity--
though theoretically correct--were not practicable. Therefore,
the Task Force has relied upon other indicia of af fordabil ity .
These indicia include examining the percentage increase in
product liability rates and premiums over time and the ratio of
current premiums to sales (expressed as a percentage) for the
target industries.
While these indicia provide a practicable method for
analyzing af fordabil ity , neither is a wholly satsfactory index
which can consistently distinguish instances in which product
liability premiums are unaffordable. Thus, an increase in a
firm's product liability insurance premium of several hundred
percent in one year may not be unaffordable if the previous
year's premium was less than a tenth of a percent of sales. On
the other hand, an increase in the ratio of current premium to
VI-12
sales (expressed as a percentage) from 0.1% to 0. 35% may be
unaffordable to a firm which cannot pass on increased costs and
which has a net profit margin of 1.0% of sales. The increase in
premium to 0.35% of sales could be unaffordable if that
cannot withstand a reduction of pre-tax profits by one-fourth
f^m
Any conclusions about the af fordabil ity of products coverage
are necessarily subject to the limitations inherent in these
measures .
The discussion of the af fordabil ity of product liability
insurance will examine the following areas:
• the increase in product liability insurance rates;
• the increase in product liability insurance premiums;
X>» the impact of product liability premium increases upon
small firms; and
• the impact of the cost of product liability upon the
cost of products.
Product Liability Insurance Rates
36
Product liability insurance rates for both manually-rated
and rated product categories have increased sharply during 1975
and 1976. According to the Insurance Study, increases in the
rates for the target product categories varied in the range of
from 100% to 500% during the first 11 months of 1976 and prior to
the December 1976 increase in ISO rates, which is discussed
below. See Insurance Study at ES-4. Rate changes for all
product categories varied from slight decreases for products with
favorable loss experience to increases of more than 900%. ^. at
2-1 , 2-13 - 2-21 .
Until 1975, there had been no increase in the ISO basic limit
manual rates since 1963- _I^. at 2-13. The ISO increased limits
factors for manual rates had not changed since 1955. _Id_. Both
were increased in 1975 and 1976. The average cumulative increase
in the basic limits manual rates for bodily injury has been 83
percent, ranging from slight decreases to an increase of 660
VI-1 3
percent in one product category. ^. at ES-4. The average
standard increased limits factor for manual rates increased 200
percent. _Id^. at 2-14. Many products received substantial
increases such as the more than 400% increase reported for
household electrical equipment and the 550% increase for tools,
dies, and j igs . Id .
At the time the Insurance Study was completed, rated product
categories had not received a formal rate increase since 1974.
Id . at 2-16. The insurance contractor, however, found that rate
increases for rated products had been implemented by insurance
companies since then on a case-by-case basis and that these
increases generally have been greater than the ISO manual rate
increases described above. Id^. at ES-4 , 2-16. The Insurance
Study, in its underwriting file survey, found that the target
product categories had "experienced average rate increases
ranging from a low of 19% to a high of 568%" since 1974. 16_. at
2-20. For all other rated products, the average increase was
251%. 2^. (See caveats to these findings. Id . )
Furthermore, the Insurance Study found that the average rate
increases between 1974 and 1976 were much greater for
manufacturers as a group (320%) than for wholesalers (29%) or
retailers (39%). Also, rate increases were greater for large
firms and medium-size firms than for small firms. During that
period the average increase for companies with over $2.5 million
in sales in 1975 was 510% versus a 39% increase for firms with
under $2.5 million in sales. ^. at 2-21.
These findings should be viewed with caution. Since the
firms in the sample were not stratified by product category or
type of business, the size of firms may be related to the nature
of the business, e.g., the larger firms may be predominantly
manufacturers while the small firms may be predominantly
retailers and wholesalers. Further, we cannot determine whether
these findings are consistent with the Industry Study where only
manufacturing firms were included.
The insurance contractor also estimated the ratio of the then
current product liability rates to sales (expressed as a
percentage) for the target categories. As with all of the above
data, it is important to remember that these figures do not
VI-14
reflect the application of experience or schedule modifications;
nor do they include data from policies which are composite rated,
loss rated, or rated retrospectively. _I1- ^^ 2-20, 2-23.
Applying basic limits rates and increased factors up to a
limit of liability of $500,000 for both bodily injury and
property damage, in accordance with industry practices, the
insurance contractor estimated that the ratio of product
liability rates in effect in 1976 to sales for the target
industries ranged from .06% up to 3.12%. ld_. , Exhibit C-2 at 2-
25 - 27. The Insurance Study found that ^8% of the product
classifications within the target industries (limited to those
rated by sales exposure in dollars) have rates which were less
than 1% of sales, while only approximately 6.0% were above 3%
range. The distribution of rates as a percentage of sales was as
fol lows :
Applied Rates as a Percentage of Sales for
Target Product Categories
Number of
Product
Percentage
Categories
Distribution
Rates less than
0.5% of sales
15.0
31.3
0.5% to 1 .0%
8.0
16.7
1% to 2%
17.0
35.4
2% to 3%
5.0
10.4
Over 3%
3.0
6.2
Total
48.0
100.0%
Source: Insurance Study, Exhibit C-1 at 2-24.
In December 1976, ISO formally revised the basic limits rates
for rated product categories for the first time since 1974.
Rates for a significant number of rated product categories were
increased more than 100%. Some of the rated product categories
experiencing rate increases of 100% or more are listed in Exhibit
V-4 in Chapter V of this report.
VI-15
This ISO rate revision occurred after the Insurance Study was
completed, and it is not clear how the revision affects that
study's findings. As was noted above, the insurance contractor
observed in its underwriting file review that most insurance
companies had already implemented substantial rate increases on a
case-by-case basis with respect to rated products since the last
formal rate revision in 197^. Insurance Study at ES-4, 2-16 -
17. The December 1976 increases may have resulted in further
increases in some cases and merely formalized de facto increases
in others.
In addition, it is important to recall that the rates for
rated product categories are intended only to be guides to
underwriters. Again, the Insurance Study found that underwriters
increased their implicit rates above those "guides" sharply when
applying the 197^ rates during the period between 1974 and 1976.
Id . It is uncertain whether underwriters will apply the (A)
rates as revised by the December 1976 filing, or whether they
will continue to modify them when applying them to specific
underwriting situations.
Some of the product categories with rates exceeding ^% of
sales following the December 1976 revision are:
• Abrasive wheels (1.18%)
• Automotive manufacturers (1.11 to 2.81%)
• Construction, mining, and material handling
equipment (3.3%)
• Farm machinery and equipment (.92% to 4.04%)
• Ladders (12.89% to 23-55%)
• Industrial machinery and equipment (2.0% to 7-3%)
• Machinery (5.3)
The level of coverage assumed in Exhibit V-6 in Chapter V,
and discussed above, is substantially below the $500,000 level
for bodily injury and property damage which was found by the
insurance contractor to be the most frequently used and which it
incorporated in its analysis . Insurance Study at 2-23; Chapter
VI, p. 15. To the extent that companies carry higher policy
limits than the limits assumed in either of these analyses, the
cost of their products coverage will be a greater percentage of
sal es .
VI-16
Product Liability Premiums
Introduction. — Data on product liability rate increases may
not indicate changes in the premiums actually being paid by
companies for several reasons. First, according to ISO, manually
rated policies represent only 10% of the total product liability
exposure. See p. V-20; Insurance Study at 2-9.
Second, both inflation and real growth in a company's sales
may cause its product liability insurance premiums for a fixed
amount of coverage to increase -- even while product liability
insurance rates remain constant. This is because product
liability insurance rates are stated in terms of the level of/
sales of a firm.
Third, as the Insurance Study emphasizes, underwriting
decisions are extremely subjective. The product liability
premiums charged by insurance companies can and do vary
substantially from the ISO manual and guide rates for many
reasons, including: the level of risk exposure, the level of
deductible accepted, the limits of liability required, the
product mix of the insured, the application of experience and
schedule modifications, and the amount of other business
37a
generated by the insured. For example, a representative of
the Hartford Insurance Group has indicated that its company's
underwriters regularly vary from the ISO manual rates in
determining premiums for products coverage. On the other hand, a
Liberty Mutual representative has indicated that manual rates are
usually applied to smaller risks
ISO itself does not know the extent to which insurance
companies abide by the manual and guide rates in determining
premiums . Therefore, the best sources of actual premium trends
that came to the attention of the Task Force were the Industry
Study, industry association surveys, letters from the public, and
information provided by the Product Liability Advisory Committee
to the Under Secretary of Commerce. These sources are reviewed
herein .
Industry Study. — The Industry Study found that 83X of the
firms that carry products coverage do so through comprehensive
general liability (CGL) policies which provide a variety of
VI-17
coverages in addition to products coverage. Industry Study,
Table IV-9 at IV-28; see also Insurance Study at 1-14. The
average cost of CGL coverage for the firms responding to the
Industry Study's telephone survey increased 207% during the
period from 1971 through 1976. The increase between 1974 and
1976 was 119%. Importantly, the level of CGL cost per thousand
dollars of sales, as well as the percentage increases, were
significantly higher for medium- and small-size firms than for
large firms. See Industry Study, Table IV-10 at IV-30, or
Chapter III of this report. Table III-5. See also p. V-20.
Because products coverage is only one segment of the coverage
provided by a CGL policy, the industry contractor asked the firms
reporting cost data for CGL policies to estimate the cost of
their products coverage for their entire product line (per $1,000
sales) from 1971 through 1976. Approximately 80% of those firms
did so, and their estimates are contained in Chapter III of this
report. The a v er_a^£--B st ijnat ed c^_st_for products coverage_fo r all
firms was $2.81 per thousand dollars of sales in 1976. These
costs ranged from $1.09 per thousand for large firms to $5.32 for
small firms. See Chapter III, Table III-6; or Industry Study,
Table IV-12 at IV-33.
The average increase in premiums paid per thousand dollars of
sales for products coverage between 1971 and 1976 for all firms
responding was 280%. The percentage increases in the cost of
products coverage for the periods 1971-1976 and 1974-1976 by firm
size were as follows:
Percentage Increase in Cost Per $1,000 Sales
for Products Coverage in CGL Policies
by Firm Size
Size of
Firm
Small firms
Medium firms
Large firms
All firms
Percent
1971-1976
384
247
102
280
Percent
1974-1976
226
223
98
209
Source: Industry Study, Table IV-12
at IV-33 (or see Chapter
III of this report. Table
III-6.
VI-18
Again, both the estimated cost of product liability coverage
per thousand dollars of coverage and the percentage increases in
that cost were substantially higher for small- and medium-size
firms than for large firms. Id »
Estimates of the cost of products coverage for the target
product categories also show substantial percentage increases in
premiums since 1974. These increases followed the period between
1971 and 1974 during which the cost per $1,000 of sales decreased
for more than half of the target categories. See Industry Study,
Table IV-13 at IV-34 or Chapter III, Table III-7. The percentage
increases in the estimated average cost of products coverage per
$1,000 of sales for the target product categories during the
periods of 1971-1976 and 1974-1976 are shown below:
Percentage Increases in Estimated Average Cost
of Products Coverage Per $1,000 Sales for Target
Categories between 1971 and 1976
Product Category
Industrial Machinery
Metal Castings
Grinding Wheels
Industrial Chemicals
Power Mowers
Automotive Components
Pharmaceutic als
Medical Devices
Aircraft Components
Percentage Increase in Cost
1971-1974 1974_1976 1971-1976
15
189
231
-23
227
153
89
90
259
-39
271
127
-01
276
271
8
149
170
46
388
613
-05
414
389
-36
71
10
Source: Industry Study, Table IV-13 at IV-34 (see Chapter III of
this report. Table III-7.
The target product categories with the largest premium
increases since 1974 were (in order of magnitude): medical
devices, pharmaceuticals, power mowers, industrial chemicals, and
metal castings.
VI-19
Despite the large increases indicated above, in 1976 the
average estimated cost of products coverage exceeded one percent
of sales only in three target categories: pharmaceuticals
(1.08%), medical devices (1.12%) and aircraft components (1.11%).
Id . Estimates of the average cost per $1,000 sales for products
coverage reported by firms in the other target product categories
were well below the one percent level. _Id^. For a discussion of
some of the problems associated with the "one percent" benchmark,
see the discussion at pp. VI-23 - 24.
The estimates of the average cost of products coverage per
$1,000 of sales reported in Table IV-13 of the Industry Study are
subject to several limitations. First, the number of firms
reporting data on the target categories is, from a statistical
perspective, very small. That total number varies from 76 for
1971 to 140 for 1976; the number of firms reporting per target
category ranged between 5 and 22 firms.
Second, the findings of the Industry Study on this subject
are to some extent based on estimates about premiums paid over a
6-year period. This is because the cost of products coverage
within a CGL policy is not identifiable for some firms . Nor is
that cost broken down by specific products in some instances.
Insurance Study at 2-30.
Finally, the premium level reported may differ depending upon
when the data are reviewed by the responding firm. In that
regard, the Insurance Study describes how estimates of premiums
may be affected by policy audits, loss experience under
retrospective plans, and policy dividends. Id .
Trade Assoc iations . — The findings of the Industry Study's
telephone survey regarding the af fordabil ity of product liability
insurance are generally in accord with data gleaned from various
trade association surveys which were made available to the Task
Force. See pp. III-18 - 48.
For example, in the MAPI survey, 86% of the 177 responding
firms reported that their product liability insurance premiums
were less than 1% of sales. MAPI Survey at 23. Twenty-seven
percent indicated that their premiums were less than 0.1% of
sales. Id. Also, 58% of the responding firms indicated that
VI-20
their total product liability costs--compr ised of premiums, the
uninsured cost of payments to others, and indirect costs related
to product liability — increased between 100% and 1,000% in the
past five years, while 30% reported that these costs increased
less than 100% during that period. ld_. at 2M.
Similarly, the average product liability premium cost was
less than 1% of sales for 46 of the 60 firms (77%) responding to
the National Machine Tool Builders Association Product Liability
Survey ("NMTBA Survey"). NMTBA Survey at C-87. The average
premium cost for the other 14 firms, all of whose sales ranged
from $5 million to $15 million, was between 1% and 2% of sales.
Id.
Data on trends in the average cost of product liability
insurance submitted by some 16 trade associations to the industry
contractor for analysis are also in accord with the findings of
the telephone survey regarding premium increases. See Industry
Study at IV-8, IV-72 - IV-74 (includes data from NMTBA Survey
above). Those surveys indicated that annual premium increases
for products coverage during the 1974-1976 period were generally
2 to 10 times as high as during the 1970-1974 period. 16_. at IV-
8. The range of annual increases during the last 2 years was
from 22% to 225% in contrast to the range of 0% to 55% from 1970
to 1974 "" . Id.
Correspondence Received by the
Task Force Regarding
by
Af fordabil ity . — The correspondence received by the Task Force
af fordabil ity of product liability insurance
affected more severely by
regarding the
suggests that some firms have been
product liability insurance premium increases than was indicated
by the averages found in the Industry Study. This information
cannot be generalized, but it is presented to show exceptional
cases that are sometimes lost in mass averaging of data. It
should be noted that, while many of the firms writing to the Task
Force stated that they have had no product liability claims made
against them, the Task Force has no independent knowledge
regarding the claims history of these firms or the degree to
which they have implemented adequate loss prevention programs.
A total of 323 letters concerning product liability were
received by the Task Force prior to January 31, 1977 . Of the
VI-21
168 firms which wrote letters specifically addressing the
subjects of the af fordabil ity and availability of products
coverage, 33 firms (20%) declared that they were unable to obtain
a quote for products coverage from any insurer, while 22
companies i^3%) stated that products coverage was unaf fordable .
Another 113 firms (67%) stated that their premiums have been
rising sharply and indicated concern as to whether they would be
able to obtain affordable product liability insurance in the
future .
Many of the companies that wrote to the Task Force regarding
the af fordabil ity of products coverage produce durable goods such
as industrial machinery. A description of five typical letters
is set forth below:
V
Industrial machinery manufacturer with minimum 1976
premium of $26,520 for $1.3 million in sales--a premium
increase of over 1,800% in one year and a premium equal
to 2% of sales; increase in premium will reduce gross
profits by 50%. Letter to Secretary of Commerce
(8/31/76).
• Industrial machinery manufacturer with 1976 premium of
$232,000 for $14 million in sales--a premium increase of
over 1,680% since 1974 and a premium equal to 1.7% of
sales. Letter to Task Force (10/7/76).
• Industrial machinery manufacturer with 1976 premium of
$41,000 for $4 million in sales--a premium increase of
486% in two years. Letter to Task Force (10/8/76).
• Packaging machinery manufacturer with 1976 premiums of
$68,000 for $1 million in coverage--equal to
approximately 2% of sales. Letter to Task Force
( 10/1 1/76) .
• Manufacturer of insulation stripping equipment, coverage
unavailable at a reasonable cost. Letter to Department
of Commerce (6/7/76).
Letters received by the Task Force from firms in other
industries also suggest that the premium increases for products
VI-22
coverage have been greater for some firms than the average
results of the Industry Study's telephone survey would indicate.
For example, the letters provided to the Task Force by the Senate
Select Committee on Small Business describe a range of premium
increases from 100% to 7,200% in one year
The Product Liability Advisory Committee to the Under
Secretary of Commerce, — Another source of information was the
Product Liability Advisory Committee to the Under Secretary of
Commerce. Generally, the members found the conclusions in the
Industry Study regarding increases in premiums for product
liability insurance from 1971 through 1976 (set forth in the
Industry Study at 1-6) to be consistent with their own
experience. Transcript, Advisory Committee on Product Liability,
Fourth Meeting, pp. 38-41 (6/27/77).
They have also indicated that, subject to several important
caveats, they concurred with the conclusion--which was set forth
in the Briefing Report--that for most industries, product
liability insurance premiums remain below 1% of sales . A
number of members, however, expressed the belief that the ^%
figure does not describe the full impact of the product liability
premium increases which have occurred since 197^. Their caveats,
which are discussed below, manifest that general concern.
First, several members emphasize that for certain firms and
industries, product liability insurance premiums are
significantly greater than 1% of sales. Furthermore, only
limited amounts of.„ coverage are available to such firms. Small
bus i n ess e s a n d___inj[nji£;3_Q J:.ijr_er-S-__Q_C.d 1 e goods _(^such_as machin e
tools) which have been in business for a relatively long period
of ~~time are' two ~^jx^mples of the type of firm for which the ^%
figure is felt to be unrepresentative
Second, they point out that the ^% figure may be misleading
because it overlooks the pyramidal or cumulative effect of the
cost of product liability premiums as a product passes through
the chain of distribution
Third, some committee members contend that the current 1977
situation is worse and that new data collection would show that
the ^% figure is being surpassed by more companies
VI-23
Fourth, there are many other costs besides insurance premiums
incurred by companies as a result of the product liability
problem . They include expenses for claims handling and
investigation, losses paid within the policy deductible, loss
prevention programs, and other indirect costs. These costs are
borne totally by the insured and are not reflected in the 1%
figure. See discussion of impact of product liability upon the
cost of products. See pp. VI -22 e_t. seq .
Impact of Product Liabil ity Insurance Premium Increases Upon
Small Firms . — The Task Force found that small firms in the target
industries have been affected more severely by the increases in
product liability premiums than medium- and large-size companies.
The data available to the Task Force suggest not only that
product liability insurance is more expensive for small firms
than for large firms in those industries, but also that small
firms are generally less able to cope with af fordabil ity
problems .
As was discussed above, the Industry Study's telephone survey
found that the size of the percentage increases in premiums for
products coverage during the period from 1971 through 1976 was
inversely related to firm size. See p. VI-18. It also found
that the estimated cost per thousand dollars of sales for
products coverage was consistently higher for small firms than
for larger firms during that entire period. Industry Study,
Table IV-12 at IV-33. Finally, of the 19 firms that reported
products coverage to be unaf fordable , 12 were small firms. Id . ,
Table IV-7 at IV-26. See also p. V-2 1 .
The data from the underwriting file survey of the Insurance
Study differ from the results of the telephone survey described
above. The underwriting file survey — which was not restricted to
firms in the target industr ies--ind icated that the percentage
increases in rates for products coverage from 197^ to 1975 were
much greater for firms with over $2.5 million in sales than for
small firms. Insurance Study at 2-21.. Specifically, it found
that the average rate increase for the former group from 1974 to
1975 was 510%, while for small firms (under $2.5 million in
sales) the average rate increase was only 39%. Id.
VI-2U
There is no certain explanation for these different pictures
of the relative position of small businesses vis-a-vis product
liability. The difference may be related to the fact that the
telephone survey was restricted to the target manufacturing
industries, a majority of which were thought to have product
liability problems when they were selected by the Task Force,
whereas the underwriting file survey covered all types of
industries including retailers and wholesalers. It may also be
related to the fact that the telephone survey describes product
liability premiums while the latter describes product liability
rates (see p. VI-17). If the firms in the underwriting file
survey had been stratified by industry category, as well as by
the size categories used for the Industry Study's telephone
survey, a more meaningful comparison could be made.
In any case, the Insurance Study did note that small firms
generally have been less able to cope with any a f fordabil ity
problems they might encounter. In that regard, it concluded that
firms with over $10 million in sales generally have been able to
retain essential products coverage at an affordable premium, in
spite of the substantial increases in product liability rates, by
making certain modifications in their coverage. These
modifications include assuming a larger deductible or accepting a
retrospective rating plan. J^. at ES-5. It found smaller
companies to be less flexible in their insurance needs and unable
to adapt their coverage to meet the exigencies of the current
product liability problem. Id .
Information from the Product Liability Advisory Committee to
the Under Secretary of Commerce and from the National Association
of Insurance Commissioners indicates that products coverage is
less affordable for any small companies than for larger firms
The National Association of Insurance Commissioners (the
"NAIC") concluded from its study of product liability that any
availability and af fordabil ity problems affected primarily small
businesses
Insurers have given reasons why premiums may be less
affordable for some small companies . First, some small
businesses are less able to keep abreast of and implement
technological advances relating to the safety of their products
VI-25
51
than larger-size firms . While data suggest that this is true
in certain cases, it does not explain all of the premium
differences between large and small businesses.
Second, small firms may not have the financial resources
necessary to retain a significant portion of their risk exposure
through a high deductible, a step which would reduce premium
costs. This is evidenced by the high incidence of low
deductibles observed among small firms by both the insurance and
industry contractors. Insurance Study at 1-15; Industry Study,
Table IV-15 at IV-37. A staff analysis of the data collected in
the Industry Study, however, suggests that the difference in the
level of deductibles between large and small firms does not
account for all of the premium differences.
Third, the impact of high product liability insurance rates
for hazardous products upon a firm's product liability premiums
can be diluted by low-risk products sold by that firm. To the
extent that small firms tend to have a narrower product mix than
medium- and large-size firms, they may be less able to benefit
from this dilution effect. The insurance industry has not
provided extensive specifics about this assertion or indicated
why it could not utilize a product-by-product premium (breaking
down the premium for businesses with a diverse product mix).
Fourth, insurance companies do not consider the individual
loss experience of small firms to be credible for underwriting
purposes. Therefore, insurance companies do not credit small
firms for good loss experience when determining their product
liability insurance premiums, as they do in the case of large
firms. Similarly, insurance companies are reportedly unwilling
to rate small firms retrospectively. Insurance Study at ES-5 .
The validity of these practices is questioned by many small
businesses .
Fifth, insurance companies perceive a greater margin of
protection in providing products coverage to large firms because
of the large premiums they generate. The insurance companies
believe that, all other things being equal, the probability that
a product produced by a small firm will cause an injury is the
same as that for a product produced by a large firm. They appear
to be comforted by the greater likelihood that the large premium
VI-26
generated by a Is^ge company will cover any big loss than is true
for small firms
Finally, insurance company underwriters may be inclined to
reduce product liability premiums for large firms because they
find other portions of those accounts to be very desirable
business . This last point would appear to have the broadest
applicability. Overall, product liability premiums may be less
affordable for a small business than for a larger business
producing a product with the same risk characteristics. Compare
the discussion at pp. V-19 - 23 in regard to insurance industry
comment on this point.
Impact of Product Liabil ity Upon the Cost of Products . --One
cannot systematically measure the impact of the increased cost of
product liability insurance upon the cost of products, and
policymakers should be wary of any generalizations made about
this subject.
As this report has indicated, estimates can be made about
product liability as a percentage of sales. See pp. VI-18 - 20.
Nevertheless, a company must then make a judgment as to whether
and how it can pass on the cost of product liability insurance in
the price of its product. It has been reported to the Task Force
that some companies in the pharmaceutical industry have been able
to do this with surprising ease . In contrast, manufacturers of
sporting goods have alleged that premiums for product liability
coverage already represent 15% of the sales price of some
sporting goods equipment, and it may not be possible to increase
prices further.
A manufacturer of durable goods which has been in business
for a long time may not be able to "pass on" increased product
liability premium costs in the price of his product. This is
because the a large portion of the rise in his premium may be due
to risks posed by older products that are still in use. A newer
manufacturer of such equipment would not be burdened with such
product liability premium costs. In order to remain competitive
with the newer companies, the older manufacturer may be unable to
reflect increased product liability insurance costs in the price
of his product .
VI-27
Some manufacturers of machine tools have estimated that at
present, product liability insurance premiums comprise over 10%
of the price of their products . This estimate would appear to
be the "high-water mark." In most situations in our target
industries, product liability insurance represents less than 1%
of sales. If we assume that the manufacturer is able to pass on
this cost to the purchaser, this does not mean that the price of
the "end product" will increase only IX. Howevever, if some
intermediate handlers, such as distributors and retailers, have
been subject to increased product liability premium costs, they,
in turn, may attempt to pass on that cost to the purchaser of the
product
Finally, there are many other costs, in addition to insurance
premiums, incurred by firms as a result of product liability.
They also may cause the price of a product to increase. These
other costs include, without limitation: losses paid that are
within the policy deductible, claims handling and investigation
by a company, legal staff expenses, product liability loss
prevention programs, and non-legal defense expenses. These
costs, too, are subject to the cumulative effect described above
at each link of the production chain. Unfortunately, accurate
data with respect to these costs may be impossible to compile.
Some industry sources allege that the total amount of these
57
uninsured costs are substantial
Subject to these limitations, our data regarding the cost of
product liability insurance as a percentage of sales give a very
general idea about how increased product liability insurance
costs have affected the price of products.
Product Introduction and Discontinuation
Introduction
The Briefing Report found that concern about product
liability has caused some manufacturers, e.g., pharmaceuticals,
to forego or delay the introduction of new products. The final
draft of the Industry Study and other new information reaching
the Task Force have supported this finding.
VI-28
Some sources have alleged that product liability suits and
increased product liability premiums have had a substantial
effect on diminishing the development of new and worthwhile
products in American industry. We have not been able to
substantiate these assertions.
Product liability problems may in certain industries
reinforce trends against new product development, and some
socially beneficial products may never be developed.
Furthermore, product liability may cause some manufacturers to
discontinue production of existing products. These trends may be
especially true for smaller firms that produce high-risk
products. On the other hand, some of the products that are not
produced or that are discontinued may be ones whose potential for
causing harm outweighs their social utility. In the time period
of our study we were not able to make a determination on this
issue, but we believe it deserves further attention.
Analysis
Industry Study Findings . — The industry contractor found that
26 of the 337 firms it surveyed (8X) stated that they had delayed
or cancelled the introduction of new products because of product
liability problems. See Industry Study at IV-13. Twenty-three
of the firms surveyed (7%) reported decisions to discontinue
products during 1975 and 1976. Industry Study at IV-12. Another
13 firms (4%) stated that they were considering discontinuing one
or more products. Industry Study at IV-63. In addition, among
the 20 firms interviewed in personal visits by the industry
contractor, 6 firms reported some constraint or reduction of
product lines because of product liability considerations.
Industry Study at IV-102.
Other Surveys of Product Manuf ac turer s . --The National
Federation of Independent Business ("NFIB") found that 12.8% of
the 1,296 firms responding to its survey reported that product
liability problems caused them to forego the development of a new
product (new to their firm). NFIB Survey at 11 (January, 1977).
In addition, 4.6% of the responding firms stated that they had
discontinued a product or plan to do so because of product
liability considerations. Id. at 10.
VI-29
Two other surveys indicate that product liability has
affected the product mix of business firms. The survey conducted
by MAPI found that 16% of the responding firms (33 of 206)
believed that the increase in product liability claims has
inhibited the development of new products or caused the
discontinuation of existing products. MAPI Survey at 2, 25.
Similarly, 17% (31 of 180) of the firms responding to a survey
conducted by five members of the U.S. House of Representatives
stated that they had been "forced to abandon" at least one
product as a result of product liability
^V
y^
Net Impact Upon Society of Product Liabil ity ' s Inhibiting
Effect on New Product Development . — It is difficult to assess
whether the net impact upon society of product liability's
inhibiting effect on new product development is positive or
negative. Product liability may deprive society of products
which, though dangerous, would nonetheless be beneficial, e.g.,
highly effective drugs, which induce serious side effects in a
small proportion of the user population. On the other hand, it
may cause manufacturers to forego or discontinue production of
unreasonably dangerous products or to delay their production
until design or production improvements can be implemented.
iT
The recent Swine Flu program is an example of the potential
impact of product liability URon the introduction of new products
and its effect upon society . In that situation the President
determined that the swine flu vaccine would be a socially
beneficial product which was vitally necessary to protect the
population against a predicted nationwide epidemic of swine flu.
Congress appropriated $135 million to fund a mass immunization
program. The pharmaceutical companies which were to provide the
vaccine, however, refused to proceed with the production of the
vaccine because they were unable to obtain adequate product
liability insurance. Despite the fact that in most states
manufacturers of pharmaceuticals have no duty to warn about
un foresseeable risks and are not subject to liability for
unavoidable risks when a proper warning is given, the companies
and their insurance carriers were unwilling to assume the entire
risk of the program. Their apparent rationale was that they
could be subject to defense costs and protracted litigation as
courts decided these issues
VI-30
The solution agreed to by the insurance carriers and Congress
had the effect of shielding the pharmaceutical companies from
liability for other than negligence and from the burden of
defending the potentially large number of claims which might
arise from the program
The Swine Flu situation is characteristic of the product
liability problem's potential to affect new product introduction,
especially with respect to the pharmaceutical and medical devices
industries. As has previously been described, these two
industries have suffered the largest percentage increase in their
product liability premiums of all the target industries during
the period of 1971 through 1976, according to the Industry
Study's survey . The pharmaceutical and medical devices
industries also have had the largest percentage increases in
premiums during the period 197^-1976: pharmaceuticals, 388%;
medical devices, 41M%.
Several letters received by the Task Force since January 1,
1977, indicate that the product liability problem might be more
severe for certain companies in these two industries, especially
highly innovative firms. For example, one company which produces
medical implants was able to obtain only one-tenth its 1975
coverage in 1976, yet its total premium increased 43%. The
president of this company indicated that the distributors for his
products were reluctant to handle them because of his company's
"inadequate" product liability coverage. The writer said that
his company has never had a product liability claim brought
62
against it . Another company which produces medical equipment
stated in its letter to the Task Force that only after a great
deal of effort was it able to secure $1 million in coverage for
1977--which the company president found to be " inadeaua te"--at an
annual premium of $197,500 or 12.3 percent of sales
To the extent that companies manufacturing pharmaceuticals
and medical devices are unable to obtain affordable product
liability coverage for their new products, as initially occurred
for the swine flu vaccine, there may be an adverse impact upon
medical research and upon the development and marketing of new
products which may be socially beneficial
VI-31
By reducing the amount of product innovation and causing the
discontinuation of some products, product liability may have a
second adverse impact. It may cause a reduction in competition
within certain industries and in the number of small
businesses . In that regard, the NFIB Survey indicated that
this impact may be concentrated in certain industries. It found
that firms in selected manufacturing industries were two to three
times as likely to discontinue or to fail to develop a product
than the firms surveyed overall . This tendency could lead to
higher concentrations of market power within those industries.
Also, because many of the firms surveyed by the NFIB have only
one product line, their failure to introduce new products or
their discontinuation of a product may dramatically reduce their
ability to compete
Business Failures
Introduction
The Briefing Report indicated that the Task Force had no
evidence that product liability problems were forcing companies
out of business. Nevertheless, this is a topic where many
undocumented assertions have been made that this was indeed
occurring
Neither the independent contractors nor the other sources
outlined at pp. 1-7 - 17 produced a single verified case of a
business failure solely and directly caused by product liability
problems. Circumstantial evidence, however, suggests that
substantial product liability premium increases may be one of
several causes that lead to the closing of small businesses in
high-risk product lines. Also, some small businesses in the
future could be placed in default by product liability judgments.
Analysis
Business Termination because of Product Liability Premium
Costs . — Substantial increases in the cost of product liability
insurance may make some companies unprofitable. Product
liability premiums have increased generally by several hundred
percent since 1974 (pp. VI-17 "^g^^r but some companies have
experienced increases of over 1,000%
VI-32
While we have found that in most instances the cost of
product liability insurance remains below one percent of sales,
it has been reported that some Xii^ms are required to pay premiums
equal to more than 10% of sales . To the extent that companies
are unable to pass this increased cost on to their customers,
product liability may severely reduce or eliminate their profit
margins. This would appear most likely to occur with respect to
manufacturers of durable goods where present prices may not be
able to absorb liability costs that have arisen due to products
produced in the remote past.
It also may occur with regard to companies that operate on
very low profit margins (ratio of net profits before tax to gross
sales). Profit margins for wholesaler-distributors, for example,
reportedly average about ^% to 3% of gross sales . Thus, if a
firm had a 3 percent profit margin and it was subject to an
increase in product liability premiums from 0.5 percent to 1.5
percent which could not be passed on to its customers, its net
profits before tax would be reduced by one-third (assumming all
other costs remained the same). To assess the ultimate impact of
this increase on the firm in question, however, one must
determine the effect of premium increases upon its rate of return
on invested capital.
It has been suggested to the Task Force that companies which
are unable to obtain adequate and affordable product liability
insurance may choose to liquidate voluntarily rather than to
expose their net worth to substantial uninsured risks from
product liability. Only one instance (unverified) of such a
voluntary,.^tiquidation has been brought to the attention of the
Task Forc(4I -'.
In this instance, a firm's premiums reportedly increased from
$2,000 to $200,000 in one year. This example has been cited
frequently, but no source has undertaken an independent detailed Cy^y
investigation of the circumstances of this company's voluntary
1 iquidation .
Recently, the names of several other firms that allegedly
have terminated business due to increased product liability
premiums have been reported, to the Task Force, but the
circumstances of these firms also have not been verified
VI-33
There are several reasons why it is difficult to obtain
accurate information as to whether businesses fail because of
product liability. First, companies which have gone out of
business are not likely to respond to surveys or to make their
views known by other means. Second, it is very difficult to
determine the cause of a business failure. Verifying that
increased product liability premiums, rather than insufficient
capitalization, mismanagement, or a combination of factors,
caused the demise of a particular business may, in fact, be
impossible. This is particularly true for small businesses which
have an average life expectancy of only several years.
In sum, circumstantial evidence suggests that in some
instances, increased product liability prem.iums may be one of
several factors that might cause a small manufacturer of a high-
risk product to terminate operations.
Business Termination because of Unsatisfied Product Liabil ity
Judgments . — As will be indicated in our discussion of mandatory
product liability insurance and unsatisfied judgment funds, no
case has been reported to the Task Force where a manufacturer was
unable to respond to an adverse product liability judgment. See
p. VII-I90. The potential, however, may exist. In that regard,
the Industry Report showed that within the small firm category,
29% of those surveyed had no product liability insurance. See
Industry Study at 1-7. Most respondents said that they "did not
need it". The contractor did not determine whether these
companies had sufficient capital and income to respond to product
liability judgments, and it is unlikely that those manufacturers
would voluntarily come forth with that information. We do know
that most of the companies surveyed by the contractor produce
high-risk goods and would have greater potential than the average
company to be subject to product liability suits.
The recent NFIB Study shows that almost 3% of its small
business membership have recently "gone bare"; they used to have
product liability insurance and no longer can affort it. NFIB
Survey, p. 3 (1977). That survey, however, does not disclose
whether those companies can affort to self-insure.
VI-34
In sum, circumstantial evidence suggests that a few
businesses may be operating without sufficient economic resources
to enable them to respond to a series of substantial product
liability judgments. At this point, however, we are left to
speculation on the matter and for that reason did not conclude
that it is necessary to enact mandatory product liability
insurance laws or establish unsatisfied judgment funds at this
time
TRENDS IN THE NUMBER OF PRODUCT LIABILITY CLAIMS
Introduction
The Briefing Report did not provide a discussion of trends in
the number of product liability claims or lawsuits. At that time
our data were too inchoate to reach conclusions on those
subjects. The Briefing Report did note that the total dollar
amount of pending claims appears to have increased substantially
in the 1970-75 period. The final version of the Industry Study
has confirmed that finding. See Industry Study at 1-8; Chapter
III at p. 3 (showing the average number of pending claims
increased nearly six times from a level of 3-5 in 1971 to 18.9 in
1976). As Chapter III indicates, large firms had the greatest
pending claims frequency. See p. III-13.
In spite of the fact that our data are still not extensive,
we believe it is important to set forth our findings as to trends
in the number of product liability claims and lawsuits, for these
are areas in which both policymakers and the public have been
confronted with a great deal of misinformation. Some
misinformation results from the fact that people are not always
careful in making the distinction between a claim and lawsuit.
Some results from the use of insubstantiated data and unreliable
estimates to advocate a particular point of view. It should be
noted that no organization, private or public, currently records
all product liability claims or lawsuits. The Insurance Services
Office records some data on product liability claims. In the
judicial system, only the State of Connecticut and the federal
courts process data on product liability law suits.
VI-35
Analysis
Despite the lack of comprehensive data, estimates of the
number of product liability claims and lawsuits have been bandied
about by all sides of the product liability controversy.
Some representatives of the insurance industry and of product
manufacturers have asserted that between 1,000,000 and 1^^500,000
product liability lawsuits were commenced in 1975. Very
recently, a product liability insurer advertised in a national
news magazine that one million claims were filed in 1976.
Representatives of consumers and of plaintiffs' attorneys
have questioned these estimates, contending that there is no
evidence to support these large numbers. For example, Mr. Ralph
Nader stated at the First World Congress on Product Liability
that the number of oroduct liability lawsuits filed annually is
approximately 50,000.
If accurate information on the number of product liability
claims and lawsuits were available, it would be valuable for at
least two important reasons. First, it would indicate how many
of the persons injured by products enter into the product
liability system seeking compensation for injuries. That
information would be useful in evaluating the tort liability
system as a reparations mechanism.
Second, such data might provide a rationale for the rise in
product liability insurance premiums which has been observed
since 197^. See p. Vl-17 _et.. seq . Our conclusions as to how
these data might be obtained are set forth at p. V-48.
Trend Data Collected and Reviewed by This Study
Industry Study
The Industry Study's telephone survey showed that the number
of new product liability claims reached an apparent plateau in
the period from 1973-1975. See Industry Study at 1-8. The same
trend was evident in the industry association surveys. _Id. at
1-9. The telephone survey also indicated that the average amount
VI-36
of damages sought per firm rose substantially from 1971 to 1976,
but there the average amount of settlements stabilized in the
period 1973 to 1975. See W.. at 1-9.
Insurance Services Office
A representative from the Insurance Services Office recently
testified that that organization has "no reliable quantitative
analysis to indicate whether and to what extent claim frequency
is increasing*
On the basis of preliminary data from ISO's Closed Claim
Survey, the organization estimates that between 60,000 and 70,000
product liability claims are filed annually in the United
79 a
States. The basis for this estimate would appear to be the
fact that ISO was able to locate 24,000 closed product liability
claims during that 8.5 month closed claim study. It estimates
that the 23 companies participating in the study write 60 percent
of the total product liability coverage.
This would render the ISO estimate a reasonable one in light
of the fact that the number of claims closed in a given year does
not necessarily reflect the number of claims made: there is a
gap between the time a claim is made and when it is closed.
Again, data are not available at the present time to make a
better estimate; we believe that ISO's estimate as to the number
of insurance claims filed annually is about the best "guess" that
has been made to date.
Connecticut Court System
Regarding trends in the number of lawsuits, Connecticut is
the only state which collects data on the number of product
liability cases filed annually. That data shows that the number
of product liability suits filed in the State of Connecticut rose
58% from 1974 to 1976. See p. 11-45. The total number of cases
filed in 1975 was 174.
Federal Court System
Likewise, statistics from the Federal court system indicate
an unquestionable increase in the number of product liability
VI-37
lawsuits being filed. The number of such cases has increased
from 1,579 in 197M to 2,886 in 1975, to 3,696 in 1976. This
represents an increase of 13^ percent in two years. In fiscal
year 1976, these new product liability lawsuits comprised 14.4
percent of the new tort cases but only 2.8 percent of the civil
cases commenced in Federal district court. See p. 11-45.
Legal Study's Survey of Appellate Cases
As Chapter II indicates, our Legal Study included a survey of
the appellate decisions involving product liability from eight
sample states during the period from 1965 through September 29,
1976. See p. II-8,
The survey found that the number of product liability
appellate cases increased by 71 percent from the 1965-1970 period
to the period January 1971 through September 1976. See p. 11-51.
Of course, an increase in appellate cases does not necessarily
reflect an increase in the number of product liability claims or
lawsuits. It is also of note that the contractor found that 33
states had an insufficient number of reported product liability
decisions to be included in the survey. Vol. Ill, Legal Study at
38.
COMPENSATION OBTAINED BY PERSONS INJURED BY PRODUCTS
Introduction
The Briefing Report indicated that some persons who are
injured by products receive full compensation from the present
tort-litigation system, but many persons do not. "Full
compensation" was defined as total recovery of all loss of
earnings, medical costs and other injury-related expenditures.
Some sources have stated their belief that product liability
is the major source of compensation for persons injured by
products. Taking account of all weaknesses in data bases,
existing information suggests that, relative to other sources of
compensation such as health insurance, welfare systems, and
Worker Compensation, that is not case. For example, the number
of product-related injuries is many times the number of claims
VI-38
made. Furthermore, there is little precise information as to
what percentage of persons who file claims actually recover full
compensation .
Analysis
Preliminary data available from the ISO Closed Claim Survey
indicate that approximately 70 percent of the claimants received
a payment from insurance companies under product liability
policies. Seventy-five percent of the claimants receiving a
product liability insurance payment obtained an amount equal to
or exceeding their "economic losses," defined as medical
expenses, W^g^ losses, and out-of-pocket expenses other than
legal fees.
In contrast to the above, the available data suggest that
persons who litigate their case to a final verdict are confronted
by a great deal of uncertainty. Thus, more than 50 percent of
those persons recover no damages. On the other hand, the
plaintiffs who do recover damages in a litigated case recover
more on the average than those who settle their claim.
Finally, with respect to cases that require litigation
(either because liability or the amount of damages is irrevocably
in dispute), it should be noted that some persons with smaller
claims may not be able to obtain the services of an attorney. We
have no data on this point, but experienced plaintiffs' attorneys
have made this observation and do not appear to have been
disputed on the matter.
THE RELATIONSHIP
ACCIDENTS
BETWEEN PRODUCT LIABILITY CLAIMS AND PRODUCT
Introduction
The Briefing Report indicated that the rate of increase in
product liability claims appears to have been rising in excess of
the rate of the increase in actual product injuries. The
significance of this finding relates to the causes of the product
liability problem: it suggests that the problem is not due to an
increase in the number of product-related accidents.
VI-39
The finding was based on a preliminary draft of the Industry
Study. While subsequent information has reaffirmed the finding,
it also suggests that some emphasis be placed on the limitations
on the data that support it. The finding would appear to be
firmer in regard to workplace products than consumer products.
Analysis
Workplace Product-Related Injuries
The Industry Study concluded that there was no apparent trend
in the frequency or severity of workplace injuries from 1966 to
1972 among the industrial products selected by the Task Force for
study which would explain any increase in the number of claims
and lawsuits against product manufacturers. See Industry Study
at 1-12, III-2. The industry contractor based its conclusion
upon an analysis of Worker Compensation cases closed during that
period in the State of New York. 16. at lll-^n - III-22. That
analysis found no significant increase in the number of cases
closed, the number of weeks of compensation awarded, or the total
compensation awarded -- both in the aggregate and for each target
product class. _Id^. (The Industry Study utilized data on the
number of weeks and total amount of compensation awarded as
surrogates for measuring trends in injury severity).
The Industry Study's conclusion regarding injury frequency is
supported by Bureau of Labor Statistics ("BLS") estimates of the
number of work-related illnesses and injuries which occur
annually in the United States. These estimates are based upon
surveys conducted at the state level which include the experience
of approximately 65 million workers in the private sector. They
include all work-related illnesses and injuries -- as opposed to
just product-related injuries -- requiring medical treatment;
involving loss of time on the job, loss of consciousness,
transfers to another job, restrictions on work or motion, or
termination of employment; or causing fatalities. The estimates
show a decline in the number of work-related illnesses and
injuries from 1972 to 1975 of 12 percent.
VI-40
Estimates of Number of Work-Related Illnesses
and Injuries (as defined above)
1971 (last six
months only)
1972
1973
1974
1975
2,934,400
5,656,700 6,078,700 5,915,800 4,983,100
Source: Bureau of Labor Statistics, U.S. Department of
Labor. (Data unavailable prior to second half of 1971).
The BLS estimates support the industry contractor's
conclusion that no trend in the frequency of workplace injuries
exists which explains any increase in the number of claims
arising out of the workplace.
It should be noted, however, that there are several
limitations to the industry contractor's conclusion. First, it
identified trends in workplace injuries on the basis of data
supplied by the New York State Department of Labor. These data
may not be representative of national trends.
Second, it should also be noted that the industry contractor
examined data relating to Worker Compensation cases closed from
1966 through 1972 only. Those data may not be relevant to trends
in the number of injuries occurring or product liability claims
made recently.
Third, there may be insufficent data presented to support the
Industry Study's conclusions as to injury trends. Regarding the
frequency of workplace injuries, the industry contractor relied
upon only the number of compensation cases closed in both 1971
and 1972 and the average number of cases closed annually during
the period from 1966 through 1970 in order to identify a trend.
See Industry Study, Table III-3 at III-15. With respect to
injury severity, data are presented for only two years, 1971 and
1972. See Id. at III-15, III-17.
VI-41
Consumer Product-Related Injuries
According to data compiled by the Consumer Product Safety
Commission ("CPSC"), the total number of product-related injuries
suffered by consumers did not increase significantly during the
period from 1973 through 1975. Furthermore, the severity of
those injuries remained stable during that period. The number of
injuries associated with some target consumer products, whose
manufacturers have reported difficulties in obtaining affordable
products coverage, however, has increased. For example, from
1974 to 1975 the number of injuries associated with the following
products increased as indicated: drugs, 23 percent; lawnmowers,
29 percent; sporting goods, 36 percent; and medical devices, 50
percent. See Industry Study, Table III-7 at III-27.
Through its National Electronic Injury Surveillance System
("NEISS"), the CPSC collects data from 119 hospital emergency
rooms concerning injuries associated with consumer products.
Those data include information on injury frequency and severity
for 950 product categories. See Industry Study at III-22 for a
more complete description of NEISS.
The NEISS data on injury frequency for all injuries reported
during the period from 1973 through 1976 are set forth below.
NEISS Data on Injuries Associated
With Consumer Products
Total Number of
Fiscal Year In j ur ies Reported
294,702
316,981
339,419
412,000
1973
1974
1975
1976
Source: U.S. Consumer Product Safety Commission.
Although there was a 40 percent increase in the total number
of injuries reported to NEISS from 1973 through 1976 (fiscal
year) period, the Industry Study concluded that overall there has
VI-42
been no significant increase in the number of injuries associated
with consumer products. Id. at III-23. This conclusion was
based upon the fact that certain improvements have been made in
the NEISS reporting system which, according to the CPSC, account
for much of this increase.
The Industry Study also found
injury severity decreases slightly
(calendar years). Id
that, based on NEISS data,
from 1973 through 1975
, Table III-7 at III-27.
As noted above, the NEISS data are limited to injuries which
required emergency room treatment. Many injuries are treated
outside that system through health clinics, private doctors, etc.
Also, data on fatalities are not included. It may be that the
NEISS data do not accurately reflect trends in consumer product
injuries. On the other hand, the increases in injuries
associated with certain products may explain in part the
substantial increases in product liability insurance premiums
Q O
reported by companies producing those products . See p. VI-17
et . seq .
WORKER COMPENSATION SYSTEMS
Introduction
The Briefing Report observed that because some workers, by
lawsuit, can shift the cost of a work-related accident from their
employers on to manufacturers of industrial products, economic
pressure on Worker Compensation is alleviated to some extent.
Analysis of the final version of the Industry Report and
other information that has come to the attention of the Task
Force permits us to expand upon this finding and the relationship
of Worker Compensation to product liability.
First, some persons injured by products in the workplace are
supplementing their Worker Compensation recovery through product
liability suits.
Second, Worker Compensation insurers and self-insuring
manufacturers or distributors are able to recoup some of their
injury compensation costs through subrogation. Although a number
VI-43
of undocumented assertions have been made to the contrary, the
amount recovered in these subrogation actions does not appear to
be significant relative to the total amount paid out by Worker
Compensation insurers. One can not generalize as to whether
employers who purchase Worker Compensation insurance benefit
(through a reduction or leveling of their Worker Compensation
premiums) from these subrogation actions. With respect to those
who self-insure, the system could reduce incentives for workplace
safety .
Third, according to some representatives of insurance
industry, product-related accidents in the workplace have been a
significant cause of the rise in product liability premium
increases incurred by manufacturers of industrial equipment.
Analysis
Employee Product Liability Litigation
Some employees who are injured in product-related accidents
in the workplace are able to augment substantially the benefits
available from Worker Compensation through product liability
litigation. This additional compensation could, in theory, have
the effect of diminishing the economic and political pressures
for increasing Worker Compensation benefit schedules, which, in
turn, may lessen the need for increased Worker Compensation
insurance premiums.
Normally, when an employee is injured in a workplace
accident, that person is paid benefits according to the statutory
benefit schedule of the Worker Compensation system of the state
in which he is employed. The statutory schedules typically
provide for benefits which are smaller than the damages which are
potentially recoverable in the tort-litigation system. For
example, injured employees are usually not fully compensated for
their pecuniary losses* nor are they directly compensated for
pain and suffering. In fact, despite significant gains in
benefit levels, the benefit schedules in effect in many states
remain well below the levels recommended by the National
91
Commission on State Workmen Compensation Laws in 1972.
VI-44
An employee injured in a product-related accident in the
workplace has a chance to increase these benefits by bringing a
claim against the manufacturer of the product that injured him.
Because of the contingent fee system, he may exercise this
opportunity at little or no cost to himself.
Employees in this position are having an impact on product
liability insurance. First, some surveys suggest that more
injured employees are resorting to product liability
litigation. Second, preliminary data from the ISO Closed Claim
Survey indicate that approximately 50 percent of the total
insurance payments for product liability were made to employees
injured in workplace accidents. Third, company claims
adjusters reporting to ISO believe that approximately 30 percent
of those payments were made for injuries which may have been
caused, in part, by employer negligence. Nevertheless, the
employers were not brought into the action because most states
grant them immunity from this type of suit.
It should be realized, however, that the number of successful
product liability claims brought by workers ig^a small percentage
of the total number of workplace injuries. Therefore, it is
not possible to conclude that the possibility of these suits has
lessened economic or political pressure for increasing Worker
Compensation statutory benefit schedules.
On the other hand, some observers have asserted that an
increase in Worker Compensation benefit levels would reduce the
number of product liability claims that arise out of workplace
accidents. There are no data to support this assertion. The
little evidence that is available suggests that the two phenomena
are independent variables within certain ranges of benefit
levels. To the extent that they are independent, an increase
in benefit levels would not be an effective means of reducing the
number of workplace product liability claims against
manufacturers .
This suggests that if it is desired to reduce the number of
product liability claims against manufacturers of industrial
goods, other alternative remedies must be considered. One such
alternative would be to make Worker Compensation a sole source
remedy for persons injured by products in the workplace. This
VI-^5
report provides an analysis of that alternative at pp. VII-103 -
112. One must also consider whether product manufacturers should
be given the right to place an appropriate portion of the tort
law costs of a product-related accident on a negligent employer.
While this would not reduce the number of workplace product
liability claims, it would prevent the employer from being able
to externalize the cost of a work-related product injury. An
analysis of this proposal is at p. VlI-70 _et_. seq .
Subrogation
Subrogation is the right of a party who has paid the losses
of an injured person to sue, or otherwise be reimbursed by, a
third party who is responsible under tort law for the injury in
question .
Subrogation may affect Worker Compensation insurance by
enabling some employers who self-insure with respect to Worker
Compensation and Worker Compensation insurance carriers to shift
some of the cost of compensating injured employees to product
993
manufacturers and their product liability carriers. Under the
law of most states, this can occur even though the employer's
negligence contributed to the happening of the accident. See
p. VII-97.
There is little information regarding the aggregate costs
shifted from the Worker Compensation system to product liability
through subrogation. A survey completed in 1976 by Teknekron,
Inc., on behalf of the Interdepartmental Task Force on Workers'
Compensation, indicates that the insurance carriers surveyed
subrogated between two and three percent of all Worker
Compensation loss payouts during the period from 1971 to 1973:
these percentages are not limited to subrogation of product
liability lawsuits. Nevertheless, applying them to the Teknekron
estimate of $3.2 billion in total Worker Compensation payments in
1975, the total amount of subrogation in 1975 for all workplace
injuries would be between $64 million and $96 million.
Unfortunately, there are no data available which indicate the
total costs actually shifted to product manufacturers and their
product liability insurance carriers through Worker Compensation-
related subrogation.
VI-U6
Two other surveys indicate that the impact of subrogation
upon Worker Compensation insurance premiums may be limited.
First, according to an estimate derived from the California
Worker Compensation Study, product-related workplace injuries may
represent only 28 percent of all Worker Compensation claims
Therefore, subrogation in product liability would not be
available with respect to the costs incurred in approximately 72
percent of Worker Compensation claims. That study did not
indicate what percentage of the product-related claims were
actually subrogated or what the total amount of subrogated costs
was. Second, the AMIA Survey of large ($100,000+) claims closed
during 1975 found that only a small percentage -- five percent --
of the total product liability payments analyzed in that survey
were successfully subrogated.
It is a matter of conjecture as to what percentage of the
total Worker Compensation costs are shifted through subrogation
to product liability. It would seem from the foregoing data that
the implicit subsidy of Worker Compensation premiums through
product liability subrogation is not major. Nevertheless, in
a limited sphere, subrogation claims increase friction costs.
Also, under the law in a majority of states. Worker Compensation
insurance carriers (and sel f- insur ing employers) may be able to
externalize the cost of a product-related accident brought about,
in part, by negligent conduct on the part of the employer.
Remedies that would modify subrogation rights of Worker
Compensation carriers are analyzed at p. VII-95 at p. 77 et_. s_eq.
seq .
PRODUCT LIABILITY LOSS PREVENTION
Introduction
Prior to our study, some sources had observed that the tort-
litigation system probably has had little or no effect on
manufacturers or insurers with respect to product liability loss
prevention. The Briefing Report found to the contrary: the
tort-litigation system and increased product liability insurance
premiums have caused a number of manufacturers and insurers to
devote more time and resources to product liability prevention.
VI-47
The final version of the Industry Study and other information
that has come to the attention of the Task Force reaffirms this
finding and also permits a more precise description of the nature
and scope of this impact.
In that regard, the data show that a much higher percentage
of large companies have implemented formal product liability loss
prevention programs than small firms. Also, insurers appear more
willing and able to provide product liability advice to large
rather than small insureds -- some small loss prevention firms
received no assistance in 1975 and 1976. In spite of all this,
many small insureds are concerned and utilize product liability
loss prevention techniques.
Although product liability loss prevention appears to be more
important to an increasing number companies, there are some
manufacturers in some industries that could improve in this area.
As discussed at length in Chapter I, we have identified unsafe
manufacturing practices as one of the principal causes of the
product liability problem. We analyze what insurers, government
and manufacturers can do to correct these practices at p. VII-172
et . seq .
We note that some manufacturers believe that there is no
relationship between their investment in product liability loss
prevention and a reduction or leveling of their product liability
insurance premiums. We discuss this problem at p. VII-177.
Although product liability problems have not provided an
incentive for all manufacturers to devote more attention to
product liability loss prevention, policymakers must be cautious
not to undermine rational incentives that do exist.
An analysis of the data and other information we have
collected regarding manufacturers' and insurers' efforts at
product liability prevention follows.
VI-48
Analysis
Product Manufacturers' Loss Prevention Programs
The product liability loss prevention programs of the firms
responding to the Industry Study telephone survey have been
described in Chapter IV. See p. IV-3 e_t. seq . That survey
suggested that firms vary as to their perceptions of what
constitutes such a loss prevention program -- as opposed to the
ordinary manufacturing practices -- and of which elements of
those programs are most effective in minimizing their product
liability. For example, while some small businesses are more
sensitive to the need for product liability loss prevention
techniques than larger ones, the telephone survey indicated that
the percentages of firms which assessed the impact of "product
design and engineering" and "product manufacturing and quality
control" as being "not applicable" to or of little impact upon
product safety were inversely related to firm size.
The Industry Study's telephone survey also indicated that
some firms have implemented what they consider to be special loss
prevention programs. Thirty-seven percent of the firms surveyed
indicated that thev had special programs to reduce their product
liability claims. Another 18 percent of the responding firms
stated that they were considering implementing such programs.
Large firms were much more likely to have implemented such
programs than small firms, as is evident from the following
program adoption rates: small firms, 19.^ percent; medium-sized
firms, 38.7 percent; and large firms, 51.3 percent. Seventy
percent of the firms with such programs indicated that they had
started the programs prior to 1974.
The most common approaches undertaken in these special
programs were: (1) augmented qual ity oControl , (2) improved
labeling, and
19
(3) product redesign.
These three techniques
were also viewed as having a significant impact on product
safety .
A high percentage of firms in certain industries, such as
industrial machinery, have recognized the need for implementing a
special program directed at product liability loss prevention and
for giving that program the full support of top management. For
VI-M9
example, the MAPI Survey found that 79 percent of the responding
firms have assigned specific responsibility for product liability
to an individual or _ad hoc committee. Furthermore, in the
vast majority of cases, that individual or committee reported
directly to a member of senior management.
It should be noted that the threat of large product liability
judgments may also have caused a shift in the focus of industry
research and development programs toward product liability loss
prevention techniques. However, further research would be
necessary to confirm this hypothesis.
While these general trends exist, we cannot describe the
exact effect the tort-litigation system is having upon product
safety .
First, it is difficult on the basis of surveys to distinguish
real increases in the commitment of product manufacturers to
product liability loss prevention from perceived changes in that
commitment. It may be that some routine tasks, such as product
design, which have always been performed to some degree as a
necessary part of the manufacturing process, are now recognized
as being product liability loss prevention techniques. This
applies as well to the firms which have implemented "special"
loss prevention programs. Thus, it may be that company
perceptions of routine tasks, as well as company loss prevention
programs, have changed.
Second, our data do not provide an exact measure of the
resources allocated to product liability loss prevention programs
firm by firm over an extended period of time.
Third, qualitative differences in loss prevention programs
are not easily measured. For example, the fact that a company
has such a program does not indicate that program's effectiveness
or the relative importance of loss prevention considerations in
management decisions.
In sum, the overall picture is one showing the tort system
and rising product liability premiums as having a positive impact
on product liability loss prevention, but it is not possible to
quantify the amount on an industry-wide basis.
VI-50
Insurance Company Loss Prevention Services
Many insurance companies state that they have increased their
efforts to provide product liability prevention advice to their
insureds. These services are usually provided as part of the
underwriting process.
Not all insureds, however, receive specific insurance company
loss prevention services. The Industry Study's telephone survey
found that only 68 percent of the firms surveyed which carried
product liability insurance had been inspected by insurance
company loss prevention engineers in 1975 or 1976. Of the 195
firms which had been inspected, only 82 (42 percent) reported
that their carriers had made specific recommendations for
reducing claims. Thus, 71 percent of the 286 firms surveyed with
product liability coverage did not receive any specific product
liability loss prevention advice from their carriers during that
1975-1976 period.
Furthermore, both the Industry and Insurance Studies found
that small businesses were less likely to be inspected by their
insurers than were large firms. The Industry Study's telephone
survey found that only 54 percent of the small firms surveyed
with product liability coverage had been inspected during the
1975-1976 period.^ ^
The underwriting file survey conducted by the insurance
contractor also showed that a higher percentage of large firms
are inspected than are small firms. The insurance contractor,
however, concluded from its interviews with insurance company
officials that this imbalance is being corrected.
Thus, it appears that small firms, some of which lack the
financial resources or technical knowledge to implement adequate
product liability loss prevention programs on their own, are
receiving fewer product liability loss preventive services than
are large firms.
Perhaps the most interesting information reported regarding
the impact of insurance company efforts in this area are the
results of the selected firm interviews conducted by the industry
contractor. Those interviews indicated that: (1) the insurance
VI-51
carriers of the 20 firms surveyed made no recommendations
regarding product safety and manufacturing processes; and (2)
perhaps more importantly, the surveyed firms perceived no
demonstrable relationship between their loss preyention programs
and their product liability insurance costs. The insurance
contractor observed that insurance companies do occasionally
consider the product liability prevention techniques of would-be
insureds, among other factors, in making their underwriting
decisions .
The perceptions reported during the selected firm interviews,
though statistically insignificant, are important because they
suggest that insurance companies may be able to be of more
assistance with regard to their insureds' loss prevention
programs. Also, where manufacturers do not perceive that
investment in product safety will earn a satisfactory return
through cost savings, they may be disinclined to devote
substantial time and resources to product liability loss
prevention. While insurance costs are only one element of the
potential savings from such investments, the lack of any
perceived correlation between these two variables may be
indicative of the need for modification of the present insurance
rating system. See p. VII-177 for an analysis of remedial
proposals that address this problem.
SUMMARY OF CONCLUSIONS
Availability of Product Liability Insurance
Total Unavailabil ity
There is no widespread problem of product liability insurance
being unavailable. A few companies in our target industries and
other high-risk product lines are having difficulty obtaining
product liability insurance. For some others, product liability
rates would appear to be unaffordable -- it has been persuasively
argued to the Task Force that this is a practical equivalent of
unavail abil ity .
VI-52
Partial Unavailabil ity
Pol icy limitations
Policy limitations that insurance companies have been willing
to offer for products coverage do not appear to have changed
significantly since 1971. Thus, insurance companies are not
forcing insureds to retain more risk by reducing the amount of
coverage that they are willing to make available. On the other
hand, some underwriters are reluctant to increase the limits of
liability for existing coverage. Thus, some manufacturers whose
products' risk exposure appears to be increasing may be unable to
protect themselves against that increase by raising the limits of
their products' coverage.
Coverage restrictions
Task Force information sources were not wholly in accord on
the question of whether coverage restrictions were increasing.
The Industry Study found restrictions on products coverage to be
more prevalent than the Insurance Study, which concluded that
coverage exclusions are rarely imposed by insurance companies.
Major product liability insurers appear to be willing to write
coverage for most product lines. Smaller insurance companies may
exclude some very high-risk products from their General
Comprehensive Liability coverage.
Deductibles
Deductibles appear to be increasingly prevalent among
our target industry groups. Furthermore, the levels of
deductibles appear to have increased significantly between 1975
and 1976 for both large- and medium-sized firms in our target
industry groups. This increase in the frequency and level of
deductibles may be a matter of choice on the part of insureds
rather than a requirement of the insurance companies.
Af fordabil ity of Product Liability Insurance
As It Affects Insureds
There has been a substantial increase in the cost of product
liability insurance since 197^ in all of the Task Force's target
industries. The increase in premiums appears to have been
VI-53
greater for small as compared to large businesses. Also, small
firms appear less able to cope with af fordability problems than
large firms. Certain industries appear to have been subject to
very substantial increases. These include manufacturers of
medical devices, pharmaceuticals, power lawnmowers, industrial
chemicals and metal castings. Anecdotal data show similar
impacts on manufacturers of sporting goods and ladders. In some
instances manufacturers -- especially of durable goods -- may not
be able to pass this increased cost on to their customers.
As It Affects the Price of Products
One cannot readily measure the exact cost of product
liability insurance as part of the price of a product. The
average cost of product liability insurance is less than one
percent of sales in most of the Task Force's target industries,
but it is higher for some manufacturers. The total cost of
product liability insurance as it affects the price of a product
may be above the one percent figure because distributors and
retailers may also pass on the cost of their product liability
insurance to purchasers. Furthermore, other product liability
costs, in addition to product liability premiums, may be
reflected in the price of a product.
Product Introduction and Discontinuation
Product liability problems in the pharmaceutical and other
high-risk product lines may reinforce trends against new product
development with the result that some socially beneficial
products may never be developed or may be discontinued. This is
especially true for smaller firms. On the other hand, some of
the products that are not produced (or are discontinued) may be
ones whose potential for causing harm outweighs their social
utility. This is an area that deserves further investigation.
Business Failures
Product liability problems do not appear to have been a
direct and sole cause of business failures. On the other hand,
circumstantial evidence suggests that substantial product
liability premium increases may be one of several factors that
cause small businesses in high-risk product industries to go out
VI-5M
of business. In the future, some small businesses may be placed
in default by product liability judgments.
Trends in the Number of Product Liability Claims
No organization, public or private, currently records all
product liability claims or lawsuits. The best "estimate" of the
number of product liability claims filed in 1976 is between
60,000 and 70,000. Data are not available that would provide a
firm indication of the trends in the number of product liability
claims in the 197^-1976 period. In our target industries, the
average number of pending claims appears to have increased
substantially between 1971 and 1976.
Compensation Obtained by Persons Injured by Products
A small percentage of persons injured by products file
product liability claims. There is little information available
regarding the compensation obtained by claimants, although, a
preliminary closed claim survey suggests that a relatively high
percentage receive their medical expenses, wage losses and other
out-of-pocket expenses other than legal fees. The preliminary
closed claim data and other data sources suggest that less than
six percent of product liability claims are litigated to a final
court verdict. Of those who litigate cases, less than 50 percent
recover any damages.
The Relationship Between Product Liability
Claims and Product Accidents
Limited data collected by our Industry Study suggest that any
increase in product liability claims in the majority of our
target industries is not due to an increase in the number of
product- related accidents. This finding appears to be firmer in
regard to workplace products than consumer products.
Worker Compensation Systems
Some persons injured by products in the workplace are
supplementing their Worker Compensation recovery by the use of
product liability suits. Worker Compensation insurers and self-
insuring manufacturers or distributors are able to recoup some of
VI-55
their injury compensation costs through subrogation in product
liability claims. These claims would appear to have only a very
minor impact on the Worker Compensation system. Insurers stress
that workplace accidents and resultant product liability claims
have been an important cause of the product liability insurance
rate increases that have been generated for industrial products
within our target groups.
Product Liability Loss Prevention
The tort-litigation system and increased
insurance costs have caused many manufactur
products to devote more time and resources to
loss prevention; however, a number of such bus
done so. Limited data show that a much hi
large, as opposed to small manufacturers,
product liability loss prevention programs,
appear to have supplied product liability advic
to large insureds than to small ones. In
executives interviewed by the industry con
perceive a direct correlation between the
product liability loss prevention programs and
insurance costs.
product liability
ers of high-risk
product liability
inesses have not
gher percentage of
have implemented
Also, insurers
e more frequently
addition, company
tractor did not
implementation of
a reduction in
VI-56
lOTES TO CHAPTER VI
(1976)
(1976)
2
Th
Study,
underwr
data on
whether
renew h
with i
produci
reluc ta
which a
3se
were ci
Insurer
hazardo
loss e
at ES-6
rveys by the Independent Insurance
(identifying 132); The Professiona
( identifying 147).
is was due in part to the research des
For example, the insurance contractor
iters and its underwriting survey did
this subject because underwriters typ
a prospective insured whom they have
as been able to obtain coverage elsewh
nsurance brokers were also relativ
ng such evidence. This was due in lar
nee of brokers to divulge informati
re "going bare." Insurance Study at 3
e Jd_., Exhibit A-1 at 3-7 for a li
ted as those underwritten only after
s were very reluctant to insure
us products or to renew policies for
xperience or with products with large
Agents o
1 Insuranc
ign of the
' s in terv i
not reveal
ically did
refused to
ere . It s i
ely unprod
ge measure
on regardin
-6.
st of produ
c ar ef ul
new accou
insur ed s
loss exposu
f America
e Agents
Insurance
ews with
any hard
not know
cover or
nterviews
uc ti v e in
to the
R clients
cts which
scrutiny .
nts with
with bad
r es . Id .
There is an inconsistency in the Insurance Study regarding
the number of firms identified by name that could not obtain
products coverage because it was either unavailable or
unaf fordable . The Executive Summary to the Insurance Study
states that the number was 62, while Chapter III uses the num.ber
7^. Id. at 3-14. According to the Technical Representative of
the Contract Officer for the Insurance Studv, the correct number
is 62.
The various trade associations reported a total of 110 firms
without coverage, but they did
there was no way of knowing the
two groups. _I^. at 3-4 - 3-14.
^NFIB Survey, Table 1 at 4.
not identify them. Therefore,
extent of any overlap between the
Id.
7
See Statement of J. F!ack, representing the NMTBA in Hearings
on Product Liability Problems Affecting Small Business Before the
Senate Select Committee on Small Business, 94th Cong., 2d Sess;,
pt. 1, at 466 (9/8/76); Letter to Task Force from FEMA
( 10/21/76) .
o
Id . (unspecified number of NMTBA members); Letter to Task
Force from FEMA (10/21/76) (eight percent of 226 usable
responses) .
VI-57
Q
See Insurance Study at 3-11. See also Statement of Judge
Ned Price, Advisory Committee on Product Liability, Fourth
Meeting, p. 32 (6/27/77).
See Statement of Lester L. Rawls, Comimissioner of Insurance
of the State of Oregon and the President of the NAIC, in Hearings
on Product Liability Insurance Premium Increases Before the
Subcommittee on Capital, Investment and Business Opportunities,
House Committee on Small Business, 95th Cong., 1st Sess., pp. 20-
21 (6/30/77).
1 1
cond u
the
which
new p
to Am
Insur
The C
surve
probl
1
Liabi
1
Rawl s
1
con tr
did
prohi
corre
of th
1
Third
1
of Missouri's survey).
concluded from that
insurance availability
Id . In addition, the Missouri Division of Insurance
cted a survey which indicated that, as of August 2, 1976,
vast majority (85 percent) of the 146 insurance carriers
write products coverage in Missouri were willing to write
roducts coverage and to renew existing coverage. See Letter
erican Mutual Insurance Alliance from Texas State Board of
ance (8/26/76) (describes results
ommissioner of Insurance of Missouri
y that there was no product liability
em in Missouri at that time.
2
See Remarks of D. McNamara, Advisory Committee on Product
lity, Fourth Meeting, p. 35 (6/27/77).
See Remarks of J. Mack, ld_. , at 35-36; Statement of Lester
, supr a at 21 .
As was described in the preceding discussion, the insurance
actor was able to identify only 62 companies by name that
not have products coverage because of its unavailability or
bitive cost. Its sources of inform.ation included the
spondence received by the Task Force prior to the completion
e Insurance Study.
17
See Transcripts, Advisory Committee on Product Liability,
and Fourth Meetings (1/11/77, 6/27/77).
See Industry Study at IV-36, and Table IV-16 at IV-38.
Id . , Table IV-37 at IV-70.
Insurance Study at 3-12.
1 9
See Remarks of Robert Clements, Senior Vice President,
Marsh and McLennan, Inc., Advisory Committee on Product
Liability, Second Meeting, pp. 21-22 (11/1/76), and Fourth
Meeting, p. 47 (6/27/77).
For example, see Letter to Task Force dated 1/31/77
(manufacturer of medical equipment which has been unable to get
more than $1 million in products coverage--a level its president
considers to be inadequate).
20
VI-58
? 1
The Machine and Allied Products Institute's 1976 Survey
reported that 159 of the 173 respondent companies, or 92 percent,
considered their coverage to be adequate. See MAPI Survey at 19.
conducted by the Kansas State Insurance
subject of the availability of product
^^1976 Survey
Department on the
liability insurance.
-^In three of those files, however, the excluded products
were covered by separate policies. Insurance Study at 1-15, 3-11
12. More generally,
products coverage offered
it found very
Id. at 3-1 1 -
little variation in the
13.
24
25
Id. at 3-6 - 7
See Industry Study, Table IV-18 at IV-41.
See Responses of the respective companies to Questions
propounded by the Subcommittee on Capital, Investment and
26
of the House Small Business Committee;
14 (6/28/77); Liberty Mutual, p. 12
>. 3 (6/20/77); Crum and Foster, p. 7
Business Opportunities
Responses: Hartford, p
(6/28/77); St. Paul,
(7/15/77) .
27
Responses to Questions of the Subcommittee on Capital,
Investment and Business Opportunities of the House Com.mittee on
Small Business submitted by the Hartford Insurance Group, p. 16
(6/28/77) and by Liberty Mutual Insurance Company, pp. 14-15
(6/28/77) .
2!
Id.
29,
30.
IMTBA Survey at C-87
^d
30a
30b
31
Id
Id
at C-92.
at C-87.
at C-92.
See Industry Study, Table IV-15 at IV-37; or Chapter III of
this report, Table III-9 and p. III-12.
32
MAPI Survey at 21. The term "Retrospective retention"
refers to the rating plans which provide for the adjustment of
the current policy premium to reflect losses incurred during the
term of the policy. See Insurance Study at 1-30.
33
See Chapter III of this report at III-10 - 12; Industry
Study at IV-29 - IV-40, IV-72 - IV-74.
3 3a
For example, see Statement of Howard J. Bruns, President,
Sporting Goods Manufacturers Association, Hearings on Product
VI-59
Liability Problems Affecting Small Business before the Senate
Select Committee on Small Business, 94th Cong., 2d Sess., pt . 1,
p. 532 (1976) (premium increases of 450 percent in 1975 for
manufacturers of equipment for sports teams); Statement of Harold
B. Halter, Executive Vice President, Farm Equipment Manufacturers
Association, _Id^., pt. 1A, p. 1417 (1976) (300 percent increase in
last 12 months in premiums paid by members responding to its
survey) .
brou
whol
prod
beca
prod
IS s
for
Liab
from
Sine
ght
esal
uc t
use
uc ts
34
^ Th
ubst
a si
35se
ilit
Mr.
e the publication of the Briefing Report, informa
to the attention of the Task Force suggesting th
er-distr ibutor s of products have experienced incr
liability premiums. This is an important dev
of the pyramidal effect it can create on the
for consumers. See Chapter VI, p. 7.
e analysis for a firm which sells more than one
antially more complex, but its objectives are the
ngle-product firm.
e Remarks of Joseph McEwen, Advisory Committee on
y. Fourth Meeting, p. 25 (6/27/77); letter to Tas
McEwen (9/2/77).
tion was
at some
eases in
elopmen t
cost of
prod uc t
same as
Produc t
k Force
36
As explained in the Insurance Study, the term
rate
the
Chap
its
(Exh
numb
sale
comp
rate
ter
cal
ibit
er
s , a
ared
means that these product categories are rated acco
manual published by ISO. See Insurance Study at
e amount of coverage provided for in Exhibi
V differs from that used by the insurance contra
culations of applied rates as a percentage o
s C-1 and C-2 of the Insurance Study). Therefo
of product categories whose rates exceed one pe
s set forth in Exhibit V-6 of Chapter V, ca
with the data in Exhibits C-1 and C-2.
anual 1 y-
rding to
1-36.
t V-6 of
ctor in
f sales .
re , the
rcen t of
nno t be
Tran
Incr
Busi
Cong
37a
scr
eas
nes
Inve
Smal
10 (
(6/2
natu
1-40
383
stm
1
6/2
8/7
re
Statement of Philip H. Dutter , McKinsey & Co., Inc.,
ipt of Hearings on Product Liability Insurance Premium
es Before the Subcomm.ittee on Capital, Investment and
s Opportunities, House Committee on Small Business, 95th
1st Sess., pp. 245-46 (6/6/77).
ee Responses to Questions of the Subcommittee on Capital,
ent and Business Opportunities of the House Com.mittee on
Business submitted by the Hartford Insurance Group, pp. 9-
8/77), and by Liberty Mutual Insurance Company, p. 8
7). For a more detailed discussion of the subjective
of the underwriting process, see Insurance Study at 1-21 -
39
See Statement of M. Walters, Vice President, Government and
Industry Relations, ISO, in Hearings on Product Liability
Insurance Premium Increases Before the Subcommittee on Capital,
VI-60
Investment and Business Opportunities, House Committee
Business, 95th Cong., 1st Sess., pp. lM-15 (6/6/77).
on Sm a 1 1
insurance and industry contractors in
extent to which ISO manual and (a) rates
premiums paid by firms in the target
not able to establish a meaningful
The Task Force staff attempted to match the data on rates and
premiums provided by the
order to ascertain the
were reflected in actual
industries, but was
corr el ation .
MO
Insurance Study at 2-30; also see Remarks of Mr. Charles
Derr (representing MAPI), Advisory Committee on Product
Liability, Fourth Meeting, pp. 38-39 (6/27/77).
il 1
The summary of these surveys appearing in Chapter I of the
Industry Study is inconsistent with these figures and should be
considered erroneous. See ld_. at 1-6.
42,
"This total includes 26 letters received by the Office of
the Ombudsman of the Department of Commerce prior to the
formation of the Task Force,
and 36 letters received by the
business and forwarded to the
Senate Select Committee on Small
Task Force for analysis.
43
Other examples include:
-A manufacturer of power mowers who found affordable products
coverage to be unavailable in 1976 after its product
liability premium increased by 600 percent in one year in
1975. Letter to Task Force (11/2/76).
-A manufacturer of small gas turbine engines which are used
as aircraft components has been unable to obtain a premium
quotation of less than three percent of sales. Letter to
Task Force (9/17/76) .
-A manufacturer of commercial cooking appliances with under
$1 million in sales had its 1976 prem.ium for products
coverage increase 445 percent in one year. Letter to Task
Force ( 10/7/76) .
-A sporting goods company reported that its 1977 premium for
products coverage increased by 358 percent over its 1976
level--a total increase in premium since 1975 of 2,100
percent. Letter to Under Secretary of Commerce (6/21/77).
-A manufacturer of respirators for hospitals was confronted
with a 1977 premium increase of 447 percent. Memorandum for
San Francisco District Office Director from Michael A.
Donohue, Trade Specialist, U.S. Department of Commerce
(7/77) .
VI-61
Committee on Product Liability,
See Transcript, Advisory
Third Meeting (1/11/77). ,
See Remarks of Frederick Juer , Advisory Committee on
Product Liability, Second Meeting, p. 18 (11/1/76), and Third
Meeting, pp. 58-60 (1/11/77) (impact on small businesses in
sporting goods ind ustr y--some firms pay up to eight percent of
sales). Remarks of James Mack, Advisory Committee on Product
Liability, Fourth Meeting, pp. M3-U5 (6/27/77) (impact of so-
called "long-tail" problem upon manufacturers of durable goods).
The impact of product liability premium increases upon small
businesses is discussed later in this chapter. See p. VI-20 et.
seq . For a discussion of the impact of product liability upon
manufacturers of durable goods, see p. VI-27.
Liab
d isc
prod
incr
repr
1 ,22
Comm
U6
il
us
uc
47
ea
es
1
it
48
Liabil
49
Mar s
whil
one
of
Advi
(11/
h
e
pe
sa
so
1/
50<
See Remarks of J. McEwen, Advisory Committee on Product
ity. Third Meeting, pp. 41-42 (1/11/77). See also the
sion of the impact of product liability upon the cost of
ts. See p. Vl-27.
The average premium for the member firms of NMTBA have
sed 86 percent in 1977 over the 1976 level. This
ents a total increase of 230 percent since 1975 and of
percent since 1970. See Remarks of J. Mack, Advisory
tee on Product Liability, Fourth Meeting, p. 99 (6/27/77).
See Remarks of Joseph McEwen, Advisory Committee on Product
ity, Fourth Meeting, pp. 23-24 (6/27/77).
For example, Mr. Robert Clements, Senior Vice President of
& McLennan, Inc., informed the Advisory Committee that,
rates for products coverage for most firms are well below
rcent of sales, those rates "may even approach 10 percent
les" for some small companies. See Remarks of R. Clements,
ry Committee on Product Liability, Second Meeting, p. 20
76).
Hear
the
Oppo
21,
the
grea
of t
affo
sale
Acco
of t
See Statement of Lester L. Rawls, President of the NAIC, in
ings on Product Liability Insurance Premium Increases, Before
Subcommittee on Capital, Investment and Business
rtunities of the House Committee on Small Business, pp. 20-
29-30 (6/30/77).
50 a
The results of the trade association surveys analyzed by
industry contractor also show the af fordabil ity problem to be
ter for small companies. Industry Study at IV-8 - IV-9. One
hose trade association surveys, however, found that the
rdability problem was most severe for its member firms with
s of between $5 and $15 million. NMTBA Survey at C-87.
rding to the NMTBA Survey, the average machine tool builder
his size paid premiums of between $12.3 and $19.2 per
VI-62
thousand dollars in sales, compared to the cost of $7.5 per
thousand dollars paid by small member firms. _Id . This phenomenon
was especially apparent for the 15 metal- form ing firms responding
to the NMTBA Survey. The average cost per thousand dollars in
sales for these firms by firm size was:
Total Sales
( in mill ions)
Less than $2 . 5
$2.5 to $5
$5 to $15
Over $15
Average Cost
per Thousand
Dollars of Sales
$3.95
$10.22
$29.53
$6.55
Source: NMTBA Survey, Supplement B, at C-92.
5 1
See Statement of John K. Dane, Vice President and General
Counsel, Liberty Mutual Insurance Company, in Hearings on Product
Liability Insurance Premium Increases Before the Subcommittee on
Capital, Investment and Business Opportunities, House Committee
on Small Business, 95th Cong., 1st Sess. (6/28/77).
5 1 a
Id . The Task Force found that large firms receive more
loss prevention advice than smaller firms. See p. VI-51.
52
See Responses to Questions of the Subcommittee on Capital,
Investment and Business Opportunities, House Committee on Small
Business, submitted by the Hartford Insurance Group, p. 14
(6/28/77). This perception could add to both the afford ab il ity
and availability problems of small firms.
53
54
Insurance Study at 1-24
See Remarks of Mr. Madden (representing Eli Lilly & Co
Advisory Committee on Product Liability, Second Meeting, p.
(11/1/76).
) ,
17
55
Liabil
cover a
by his
( premi
price
56
Joseph
Meetin
57
Produc
See Remarks of R. Baldwin, Advisory Committee on Product
ity. Third Meeting, -. 43 (1/11/77) (premiums for products
ge comprise 10.4 percent of the price of machine tools sold
firm); Remarks of F. Juer , 2d_ . at pp. 58-59 (1/11/77)
ums for products coverage comprise 15 percent of sales
of some sporting goods).
See Volume III, Legal Study at p. 74; also see Remarks of
McEwen, Advisory Committee on Product Liability, Fourth
g, pp. 23-25 (6/27/77).
See Remarks of Charles Stewart, Advisory Committee on
t Liability, Third Meeting, pp. 92-93 (1/11/77); also see
VI-63
Remarks of Joseph McEwen, Id . ,
(6/27/77); MAPI Survey at pp. 23-24.
58
Fourth Meeting, pp. 23-25
Whal en , Jr
Hon. Edward
'Joint Statement of Hon. Charles W. „w.^_.^w,
W. Pattison, Hon. Donald J. Pease, Hon. Joel Pritchard, and Hon.
Newton I. Steers, Jr., Hearings on Product Liability Insurance
Premium Increases Before the Subcommittee on Capital, Investment,
and Business Opportunities, House Committee on Small Business,
95th Cong., 1st Sess. (April 4, 1977).
58 a
The discussion of the swine flu situation which follows
attempts to describe the events as they occurred. The Task Force
advances no opinion as to whether the conduct of the
pharmaceutical and insurance companies was justifiable.
59
60,
See pp. VII-29 - 32.
'The National Swine Flu Immunization Program, as enacted,
provides that the exclusive remedy for personal injury or death
arising out of the swine flu program is against the Federal
government under the Federal Tort Claim Act (28 U.S.C. S1346 (b)
(1970)). National Swine Flu Immunization Program of 1976, P.L.
No. 94-380 (Aug. 12, 1976). The Federal government, in turn, has
the right to recover all or any portion of the damages it pays
which are attributable to the negligence of any program
participant, including any participating pharmaceutical company.
Pharmaceuticals, 613 percent; medical devices, 389 percent.
See chapter VI, (See Industry Study, Table IV-13 at IV-34).
See Letter to the Task Force, (1/14/77). The writer
predicted that either his company would fail due to a lack of
adequate coverage or it would become a target for acquisition by
a larger company better able to assume the risks involved in
developing and marketing highly innovative medical devices.
63,
See Letter to the Task Force (1/31/77).
64.
Richard D
Liabil ity ,
In that regard, see Comments of Mr
Transcript, Advisory Com.mittee on Product
Meeting, pp. 78-79 (1/1 1/77) .
65
This impact was suggested by correspondence received
Task Force and by the NFIB Survey. See Letter to Task
(1/14/77); NFIB Survey at 10-11. Survey at 10-11.
Wood ,
Third
by the
Force
66
Those industries were SIC's 28-30, Chemicals, Petroleum,
Rubber and Plastics; and SIC's 34-37, Fabricated Metal Products,
Tools and Machinery). See NFIB Survey, Table 15, at 11.
r y
For a discussion of the effect of product liability upon
business survival, see NFIB Survey at 11; Letter to Task Force
(1/14/77); pp. VI-32 - 35.
VI -6 4
For example, see Statements of Mr. Richard Tittle,
President of Micro Metals, Inc., representing the National Small
Business Association, and R. Baldwin, representing the
woodworking machinery manufacturers (also a member of the Product
Liability Advisory Committee to the Under Secretary of Commerce),
in Hearings on Product Liability Problems Affecting Small
Business Before the Senate Select Committee on Small Business,
94th Cong., 2d Sess., pt. 1, at 3, 511 (1976); Statement of
Harold B. Halter, Executive Vice President, Farm Equipment Mfgrs.
Assn., _I^., pt. 2, at 141? (1976) (21 percent of members perceive
product~Tiabil ity as being a threat to their continued survival);
Transcripts, Advisory Committee on Product Liability, First
Meeting, pp. 58-67 (9/20/76), and Second Meeting, p. 87
(11/1/76).
^^See 21-5 Letter to Secretary of Commerce (8/31/76)
(industrial machinery manufacturer with minimum 1976 premium of
$26,520 for $1.3 million in sales--an increase of over 1,800
percent above 1975 premium which reduced profits by 50 percent;
Letter to Task Force (10/7/76) (industrial machinery manufacturer
with premium increase from 1974 to 1976 of 1,700 percent).
70
See Chapter V, p. 10 _et. seq . ; Chapter VI, p. 22; Letter to
Task Force from machine tool company (1/31/77) (1976 premium
equals 12.3 percent of sales).
7 1
See Letter to Task Force from Messrs. Joseph McEwen and
William M. Brooks, members of the Product Liability Advisory
Committee to the Under Secretary of Commerce (6/27/77).
'''^See Wall Street Journal, p. 1, Col. 3 (6/3/76).
73
For example, see testimony of Howard J. Bruns, President of
Sporting Goods Manufacturers Association, Hearings on Product
Liability Insurance Premium Increases Before the Subcommittee on
Capital, Investment and Business Opportunities, House Committee
on Small Business, 95th Cong., 1st Sess. (4/18/77); Letter to
Task Force from R. Baldwin (6/21/77) (names of seven additional
companies which have allegedly been forced out of business by
product liability).
74
Our data on this issue are further developed in Chapter VII
at p. 151 .
'^^E.g . , Forbes, at 57 (8/1/76) (Frederick Watkins of Aetna
Insurance Co. estimated one million such lawsuits were filed in
1975); Wall Street Journal , p. 4, col. 12 (10/27/76) (cites
Conference Board estimate of one million suits); Statement of
Richard Tittle, President of Micro Metals, Inc., in Hearings on
Product Liability Problems Affecting Small Business Before the
Senate Select Committee on Small Business, 94th Cong., 2nd Sess.,
pt . 1, p. 4 (September 8, 1976) (estimate of 1.5 million lawsuits
filed in 1975).
VI-65
76
See Time Magazine,
1 (9/12/77)
The advertisement
"No one likes higher prices, but we're telling it
stated in part,
straight."
77
Remarks of R. Nader: Proceedings, First World Congress on
Product Liability, p. 184 (1977). Similarly, Robert Begam,
President of the Association of Trial Lawyers of America, has
stated that the number of product liability lawsuits filed in
1975 was, at most, 38,450. See Trial Magazine , p. 48 (November
1976) .
78
lawsui
urged
The Ta
becaus
produc
from
liabil
79
the H
Oppor t
Sess . ,
Data on the trends
ts commenced annually w
the Task Force to und
sk Force decided that s
e of its prohibitive c
e data of little or no
the ISO Closed Claim
ity claims do not resul
in the number of product liability
as felt to be so important that many
ertake a survey of courthouse files,
uch a survey would be impractical
ost and because it would necessarily
significance statistically. Data
Survey suggest that most product
t in lawsuits filed.
VJalters, Vice President, ISO, Before
Capital , Investment and Business
See Statement of M.
ouse Subcommittee on
unities, House Committee on Small Business, 95th Cong., 1st
p. 20 (6/6/77).
79 a
Id . Preliminary dat
indicate that less than six
claims analyzed were litig
1976 Product Liability Closed
Preliminary Survey Results, p
a from the ISO Closed Claim Survey
percent of the product liability
ated to a final court verdict. ISO,
Claim Sruvey: Detailed Analysis of
. 94 (December 1 976) .
79b^
Closed C
with re
ISO.
80lS
Prel imin
impact o
full ec
caref ull
the me
prel imin
1 iab il it
82
SO has reported to the Task
laim Survey will show that no
spect to 73 percent of all the
Force staff that its Final
lawsuits were comm.enced
closed claims analyzed by
0, 1976 Product Liability
ary Analysis of Survey Results,
. , Table 2-1 at 33- ISO did
f legal fees upon a claimant's
onomic losses. The final ISO C
y analyzed in regard to changes
thodology relating to how t
ary data indicate that less tha
y claims are litigated to a fin
e p. 11-43 _e_t. seq . (citin
review of appellate cases (50%)
35%), Down state Illinois Jury S
Se
Stud y ' s
Survey (
City Trial Lawyers' Association Survey
Closed Claim Survey:
p. 6 (December 1976).
not attempt to analyze the
ability to recover his
losed Claim Survey must be
in these estimates and
hey were compiled. ISO
n 6 percent of product
al verd ic t .
g results fron^ the Leg?l
, the Cook County Jury
urvey ( ^9%) and the Kansas
(3670.)
VI-66
83
Closed
84
on Pro
85
Based on a comparison of the results of the preliminary ISO
Claim Survey and the Illinois Jury Verdict Survey.
See Remarks of M
d uc t Liabil ity , p
Belli, Proceedings, First World Congress
177 (1977).
in J u
OSHA
the
indu
seve
Ind u
info
r 1
Me
St
r i
86
St
rm
BLS does not compile data on the number of product-related
es occurring annually in the workplace. As is noted above,
estimates are not available for the same period for which
w York Worker Compensation data were analyzed by our
ry contractor (1966-1972). Finally, BLS data on injury
ty were not available.
The data from
ry Study are
at ion . Id . at
five other
for 1974
III-4.
states which are presented in the
only and provide no trend
86a,
The Industry Study also assumes that changes in the number
of weeks and amount of compensation awarded are accurate
surrogates for determining trends in injury severity. While the
Task Force has no information regarding this assumption, there
may be economic or other factors which distort the relationship
between injury severity and these two surrogates.
fi A K
Similarly, according to FAA data analyzed by the Industry
Study, the number of general aviation accidents reported has
increased by 82 percent during the period from 1965 to 1974.
Industry Study, Table III-8 at III-30. On the other hand, the
number of injuries associated with chemicals decreased by 51
percent from 1974 to 1975. _Id_., Table III-7 at III-27.
Furthermore, several of the target consumer products are among
the 25 product categories (3 percent of the total number that are
monitored) which were associated with approximately 60 percent of
all injuries reported through NEISS from 1973 through 1975. Id .
at III-23. The target products include pharmaceuticals and
lawnmowers. Id., Table III-6 at III-25.
^^Letter
of Planning
(9/27/77).
88.
to Task Force staff by William W.
Division, Office of Strategic
Wal ton , Director
Planning, CPSC
these percentage
NEISS reporting
It is unclear what portion, if any, of
increases resulted from the improvements in the
system referred to above.
89
The statutory rationale for the lower benefit levels is
that the employee has given up his cause of action in tort
against his employer, and the possibility of recovering greater
damages, in exchange for the payment of benefits on a no-fault
basis through what is intended to be a non-adversarial process.
For criticism of the effectiveness of the current benefit
delivery system for Worker Compensation, see Workers'
Compensation: Is There a Better Way? Report to the President
VI-67
and the Congress of the Policy Group of the Interdepartmental
Workers' Compensation Task Force, pp. 27-29 (1/19/77) ("Worker
Compensation Report").
90
91
45.
See p. VII-86.
Worker Compensation Report, Note 1, supra at pp. 20-23, 39-
9
Third
See
Meet
93
Build
ind ic
man uf
workp
repor
Simil
cl aim
("AMI
cl aim
The
er s '
ate
ac tur
1 ace
ts we
arly,
s clo
A Su
s ana
94
Analy
the
Claim
thoug
9
wheth
injur
regar
and V
9
See
sis ,
Task
Surv
ht to
Tr anscr ip
ing, PP- 3
surveys
Assoc iatio
that lega
ers with r
ace id en ts
re filed .
the Ame
sed during
rvey") fo
lyzed invo
ISO Surv
Table 6-2,
Force sta
ey will be
be over $
Id . , Detailed
er Worker Compe
ed employees
ding contribut
11-89 et. seq. ,
See Volume II,
t, Advisory Committee on Product Liability,
5-36 (1/11/77).
conducted by the National Machine Tool
n, albeit of little statistical significance,
1 actions were brought against machine tool
espect to approximately 45 percent of the
involving their products in which accident
See Industry Study, pp. VI-12, VI-13.
rican Mutual Insurance Alliance's survey of
1975 with total payments exceeding $100,000
und that 70 percent of the awards in the 79
Ived industrial products. J[d. at VI-10.
ey. Capsule Analysis, p. 9, and Detailed
p. 59 (12/76). However, ISO has reported to
ff that the average award in the Final Closed
$47,900. In the preliminary survey, it was
100,000.
Analysis, pp. 40-43. For a discussion of
nsation should be the exclusive remedy for
and of the proposals to modify the rules
ion and indemnity, see p. VII-IO3 £t^. seq .
respectively.
Industry Study at D-17.
In California it has been estimated that only 287o of Worker
Compensation claims involve industrial equipment. Only a
percentage of these accidents would result in successful product
1 iabil ity claims .
97
See Transcripts, Advisory Committee on Product Liability,
Second Meeting, pp. 39-43 (11/1/76); Third Meeting, pp. 31-33
(1/1 1/77) .
98
See Insurance Study at 4-67; Volume III, Legal Study at
100-101; Transcript, Advisory Committee on Product Liability,
Third Meeting, pp. 33, 35-36 (1/11/77).
99,
See pp. VII-95
96.
VI-68
QQa
To the extent insurance carriers write both product
liability and V/orker Compensation insurance, the effect of
subrogation will be reduced.
100,
A Survey of VJorkers
See Industry Study at VI-1 1
Compensation Insurers: Preliminary Report, Teknekron , Inc.,
Berkeley, California (9/15/76).
101
102
See Industry Study, Volume II at D-17.
Industry Study at VI-10
103-
of p
them
Task
Prel
Surv
mill
were
of t
firm
con t
larg
58.
some
There is a good deal of specul
roduct liability claims that are in
selves. See pp. VII-95 - 96. et .
Force staff that it will reduce it
iminary Closed Claim Survey to 18%
ey.
1 04
Approximately 50 percent of the
ion in sales indicated that "produc
"not applicable" to product safe
he larger firms surveyed. Nearly 4
s surveyed found that "product
rol" were "not applicable," while o
e firms agreed with that assessmen
As noted at p. VI-50, semantica
of these differences.
104a
ation about the percentage
stigated by the carriers
seq. ISO reported to the
s estimate from ^0% in the
in the Final Closed Claim
firms with less than $2.5
t design and engineering"
ty, compared to 12 percent
1 percent of the small
manufacturing and quality
nly 8.7 percent of the
t. Industry Report at IV-
1 difficulties may explain
See Industry Study, Table IV-32 at IV-61.
105
106
107
108
109j
of the e
Chapter
1 10
Id., Table IV-33 at IV-63.
Id., Table IV-32 at IV-61.
lA-
Id.
d., Table IV-31 at IV-59. For a more complete discussion
lements of product liability prevention programs, see
IV of this report.
MAPI Survey at p. 12.
_d. at p. 13.
A recent study of business research and development
investments prepared by the Battelle Memorial Institute indicated
that the tort liability system has caused an increased investment
in "applied research to prevent liability" from products. See
Remarks of J. Sheehan , Legislative Director of the United
1 1 1
112
VI-69
Steelworkers of Ame
Third Meeting , pp .
1 1 ^
^Thus , in th
of the respondent
"special program d
while 60 percent st
dealing with "pro
Industry Study, Tab
difference may tu
it is also possibl
product prevention
1 1 4
For a desc
this report at IV-5
Insurance Study at
Vice President an
Company, in Hearin
Increases Before
Business Opportunit
Cong . , 1st Sess . , p
rica, Advisory Committee on Product Liability,
74-75 (1/11/77).
e Industry Study's telephone survey 37 percent
firms indicated that they had adopted a
irected at reducing product liability claims,"
ated that they had product safety programs
duct manufacture and quality control." See
le IV-32 and IV-61; Chapter IV at IV-6. The
rn on the word "special" or other factors, but
e that there is confusion regarding what
techniques are.
ription of these services, see Chapter IV of
, IV-10 - 11; Industry Study at IV-12 - IV-m;
1-42. See also Statement of John K. Dane,
d General Counsel of Liberty Mutual Insurance
gs on Product Liability Insurance Premium
the Subcommittee on Capital, Investment and
ies. House Committee on Small Business, 95th
p. 1-14 (6/28/77).
1 16a
1 17,
Id. at IV-25.
The comparable percentages for large- and medium-sized
firms were 74 percent and 72 percent, respectively. See Chapter
IV at IV-5, IV-10; Industry Study at IV-13, IV-60.
-I 1 Q
Insurance Study at 1-42.
1 1 9
For a discussion of the disadvantages of small firms in
coping with the product liability problem, see pp. VI-24 - 27.
120,
See Industry Study at IV-102.
^^hnsurance Study at 1-38, 1-44; see Chapter VII at p. 143
for a more complete discussion of this issue.
VI -7 0
Chapter VII
Remedial Approaches in the
Field of Product Liability
Part I
Introduction
CHAPTER VII--REMEDIAL APPROACHES IN THE FIELD
OF PRODUCT LIABILITY
II.'TRODUCTION
THE SOURCE AND SCOPE OF REMEDY ANALYSIS
Many proposed modifications in the current system of product
liability law (remedies) have been brought to the attention of
the Federal Interagency Task Force on Product Liability. Som.e
have been homespun attempts at "reform" that lack any in-depth
development or analysis. These proposals were usually contained
in letters from distressed manufacturers who simply wanted "quick
relief" from the current product liability system. The authors
of these letters feared that the continuation of the current
system might cause them to go out of business.
The Task Force also received some more highly developed and
specific remedial proposals. Suggestions of this type came in
response to our notice in the Federal Register of our Scope of
1
Research being conducted. Other recommendations were brought to
our attention by members of the Under Secretary of Commerce's
Advisory Comimiittee. Suggestions about remedies were also
developed at a symposium held under Task Force auspices. The
Task Force and its staff engaged in a process of continuing
development, analysis, and review of remedial proposals
throughout the course of the study. See Ch . I, pp. 7-18.
Our legal contractor reviewed legal literature, case law, and
statutory models (when available) that related to all remedies
considered in this chapter. Our industrial contractor gave
special attention to remedies it believed had the potential for
near-term alleviation of current manufacturer product liability
problems. These include the use of Worker Compensation as an
exclusive remedy for workplace accidents, the development of
safety certification programs for industrial and unregulated
consumer products, mandatory provision of product liability
prevention programs by insurers and self-insurers, changes in
federal accounting rules and standards for write-off of
contingent liabilities. Our insurance contractor gave special
attention to remedies that would affect a direct change in the
VII-1
rr.ethods whereby product liability insurance was underwritten and
regulated. It also evaluated most of the remedies considered
herein and attempted to estimate their im;pact on reducing the
cost of product liability insurance.
The reader should consult the Task Force legal, industrial,
and insurance studies for a specialized treatment of remiedial
proposals. Those studies also contain citations and supporting
data for some of the assertions miade in this chapter.
This chapter will not attempt to discuss all remedial
proposals concerning product liability. Rather it will select
those which, on the basis of information brought to the attention
of the Task Force, deserve full analysis and treatment.
Moreover, the chapter will give more thorough treatment to
remedial proposals that have not been considered in the past by
other sources. Our goal was to provide an analysis of remedies
that could be readily used by legislatures or others who are
giving immediate consideration to product liability reform. It
is our hope that our discussion of remedies will be useful to
those sources and show most of the significant implications of
the remedial proposals discussed herein.
Finally, it should be noted that our discussion of remedies
in this chapter does not evaluate whether product liability
insurers have engaged in unfair or unreasonable practices in
pricing their products. In that connection there have been some
suggestions by a variety of sources that neither the number nor
severity of product liability claims justify current increases in
product liability insurance rates. Our discussion of that
problem and potential remedial action can be found in Chapter V
of this report.
BASIC CONSIDERATIONS IN EVALUATING REMEDIES
In the course of our study, we have learned that many
considerations must be taken into account in the process of
evaluating potential modifications in product liability law. If
one approaches evaluation of such modifications through a strict
number of "criteria," the rigidity of that analysis is likely to
lead to oversight or omissions of important matters. For that
VII-2
reason, we have not limited ourselves to a specific number of
remedy calipers.
Nevertheless, it did not seem appropriate to be totally
freewheeling in our remedy evaluation. There were a number of
important considerations that can be utilized in evaluating each
of our remedies where--indeed--we have information that would
render it possible to do so. As will be evident from the
discussion in this section, these considerations, to some extent,
"establish conflicting goals." This is because the product
liability system is subject to the conflicting interests of
injured parties, manufacturers, insurers, and others.
We have attempted to evaluate remedies in as objecti\/e a
manner as possible while deriving some assistance toward that
goal from the six considerations set forth below.
Consideration I
Ensure that a person injured by _an unreasonably unsafe
product receives reasonable compensation for his or her injury .
Neither this report nor others can detail the precise scope
of the product liability problem. Nevertheless, from the
perspective of some businesses it would appear to be a "crisis."
In an atmosphere of crisis, resort is sometimes made to harsh
measures that thwart the rights of ordinary individuals. We deem
it inadvisable to rush toward such remedial approaches. We note
that many thoughtful persons have acclaimed the development of
the current product liability system and its attempt to provide
compensation for persons injured by products. See, e.g., DOC
Transcript, The Product Liability Advisory Committee to the Under
Secretary of Commerce (4th meeting, June 27, 1977), remarks by
Ms. Anita Johnson of Public Citizen's Health Research Group, pp.
76-83 [hereinafter cited as Advisory Committee].
Over 30 years ago, Mr. Justice Traynor stated one of the
basic reasons for placing the cost of injuries caused by unsafe
products on the manufacturer. He said:
The cost of an injury and the (subsequent) loss of time or
health may be an overwhelming misfortune to the person
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injured, and a needless one, for the risk of injury can be
insured by the manufacturer and distributed among the public
as a cost of doing business.
As the current insurance situation in regard to product
liability suggests. Justice Traynor's thesis may have its
limitations: at som.e point some manufacturers, retailers or
distributors of products m,ay not be able to bear the full common
law cost of injuries. Nevertheless, in evaluating each of the
proposed remedies, one must not overlook the practical core of
Justice Traynor's thesis: a person who is injured by an
unreasonably unsafe product should receive reasonable
compensation for his injuries from the manufacturer of that
produc t .
Obviously, this proposition has within it a
questions. First, v-;hat is "reasonable" compensa
consideration of proposed remedies, we will addre
this topic. Second, what is an "unreasonably un
Obviously few, if any, courts would impose
manufacturer of knives when a person cuts himself
of using that product. On the other hand, m.ost co
a manufacturer should be responsible for a fore
caused by an unsafe condition in the constructio
In our discussion of remedies, v;e will attempt to
insight into what should be deemed an "unrea
product for the purposes of product liability.
t least two key
tion? In our
ss ourselves to
safe" product?
1 iabil ity on a
in the course
urts agree that
seeable injury
n o f a product .
provide useful
sonably unsafe"
In sum, the basic thrust of this consideration is to look
with a critical eye on remedies that can only be justified by the
fact that they contain "cost saving devices" for product
liability ins